MUMBAI: Several digital lenders and microfinance companies have urged the Reserve Bank of India (RBI) to introduce a clear formula for calculating interest rates on small-ticket loans, citing concerns over regulatory uncertainty and business disruptions.
The move comes in the wake of the RBI’s recent crackdown on certain non-banking financial companies (NBFCs) over excessive lending rates.
Industry players argue that while the RBI does not directly regulate lending rates, its interventions – through public statements and advisories – have influenced pricing practices in the sector.
The central bank’s October action against firms such as Navi Finserv, Asirvad Micro Finance, and Arohan Financial Services over high-interest rates on small-ticket loans has further intensified the demand for a structured formula to ensure fair pricing and regulatory compliance.
Regulatory ambiguity?
Digital lenders and microfinance institutions contend that the lack of a standard interest rate formula leaves room for regulatory ambiguity, making it difficult to assess what constitutes ‘excessive pricing.’
While banks have the flexibility to set lending rates based on their cost of funds and risk assessment, smaller lenders – who primarily cater to financially underserved borrowers – often face scrutiny for charging higher rates due to their elevated risk exposure.
“If there is no clear framework, interventions in the form of bans or restrictions create uncertainty in the industry. A structured formula will provide transparency and ensure that borrowers are not charged unreasonably high rates while allowing lenders to sustain their operations,” said an executive at a leading microfinance firm while talking to businessbenchmark.news..
RBI’s stance on interest rates
Over the past year, the RBI has increasingly signaled its discomfort with steep lending rates, particularly in segments where financially vulnerable borrowers are involved.
While the central bank has maintained that it does not directly control lending rates, it has periodically issued advisories urging financial institutions to adopt responsible lending practices.
In February 2024, RBI Governor Shaktikanta Das underscored the need for ethical lending norms, cautioning against exploitative interest rates in the digital lending space.
This was followed by an August 2024 directive advising NBFCs to review their pricing structures in light of customer affordability.
Industry seeks a framework
Microfinance companies and digital lenders are now advocating for an interest rate formula modeled on international best practices.
Some countries follow a cost-plus approach, where rates are benchmarked against the cost of funds, operational expenses, and a reasonable margin. Others use a risk-based pricing model that considers borrower creditworthiness and loan tenure.
“We need a well-defined mechanism that balances consumer protection with business viability. Unregulated interest rate ceilings can discourage lending to riskier segments, cutting off credit access for those who need it the most,” a fintech executive told this business news portal.
With the RBI tightening its oversight of digital lending and microfinance, industry players are hoping for a structured approach that offers clarity while maintaining a fair and competitive lending environment.
Whether the central bank will introduce a formal pricing framework or continue its indirect interventions remains to be seen.
