High charges: Will RBI come down heavily on NBFCs and MFIs?

Issue was brought up in two different forums by RBI officials in a span of three weeks

MUMBAI: Is the Reserve Bank of India (RBI) consciously building a case against NBFCs and microfinance institutions that charge excessively high rates on small-value loans?

Currently there are no specific regulations or directives to prevent financial institution from charging excessively high interest rates and other charges on small value loans.

The way the RBI top officials have been bringing up this issue at different forums lately prompts one to infer that something is in the works at the RBI level.

According to NBFC sources, RBI may eventually come out with some regulations that aim to control the charging of excessive interest and other charges, especially by NBFCs and microfinance institutions (MFIs).

All know that the RBI Governor, Shaktikanta Das, has taken up the issue of high rates charged by certain NBFCs and MFIs on small-value loans while speaking after the monetary policy committee (MPC) decisions were announced in Mumbai on June 7.

Apart from this, about three weeks ago, on May 15, Swaminathan J, Deputy Governor of RBI, also brought up this topic while addressing an NBFCs conference in Mumbai.

In his speech, Swaminathan J warned the NBFCs against charging excessive interest and made it a point to remind them of the likelihood of ‘supervisory scrutiny’ if they continue to charge excessive rates.

Customer protection top priority

The RBI Governor in his speech said customer protection remains on top of the Reserve Bank’s priorities. He said, “In general, we have observed that guidelines on Key Facts Statement (KFS) are followed, but a few regulated entities, including NBFCs and MFIs, still charge fees, etc that are not specified or disclosed in the Key Facts Statement (KFS).

He also added that it has also been observed in some microfinance institutions (MFIs) and NBFCs that the interest rates on small-value loans are high and appear to be usurious.

In a seemingly veiled warning, he added, “The Reserve Bank continues its constructive engagements with such financial entities to safeguard the interest of customers and ensure overall financial stability.”

While addressing the NBFCs on May 15 in Mumbai, Swaminathan said though RBI has given the liberty of benchmarking and pricing of loans to the boards of NBFCs, he raised the point that ‘the Master Directions in this regard clearly state that rates beyond a certain level may be seen to be excessive.’

 “And this can neither be sustained nor be considered as conforming to normal financial practice. Therefore, excessive rates will invite supervisory scrutiny,” he pointed out at the meeting.

In about three weeks, two top RBI officials flagged the issue of high interest rates charged on small-value loans by certain NBFCs and microfinance institutions (MFI).

Some NBFCs charge criminally high rates

There are NBFCs, who charge interest rates as high as 35 or 36 per cent on business loans. More intriguingly, a failed installment can attract fines as high as Rs5,000 apart from the bank’s charges for returning cheques. In many instances, the installment itself could be less than the fine of Rs5,000.

Talking to businessbenchmark.news, the credit head of a local bank said, “I strongly believe RBI is a bit concerned about excessive rates charged by some NBFCs and MFIs on small value loans. RBI may do something about it soon.”

The height of irony is that this is a market where large corporates with strong financial backing can secure loans at bargain rates, while individuals who desperately need loans to sustain their small businesses are forced to pay through the nose.