RBI cautions micro lenders, NBFCs against high, ’usurious’ interest rates

Mumbai: The Reserve Bank of India (RBI) on Friday said it has come across instances of micro lenders and non-bank financiers charging high, 'usurious' interest rates on small-value loans, reminding them to judiciously use their pricing power.

The regulator reiterated that customer protection is one of its top priorities.

This comes two years after the regulator removed pricing caps from MFI (microfinance institution) loans, instead relying on these lenders to have policies that are approved by their boards. In March 2022, RBI said banks, non-banks and micro lenders must have a policy on pricing of microfinance loans. While such internal policies were mandated to include a ceiling on the interest rate and all other charges on microfinance loans, the cap would no longer be decided by RBI.

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Friday’s observations are not without warning. The March 2022 circular cited earlier had specified that “interest rates and other charges or fees on microfinance loans should not be usurious” and would be subjected to RBI scrutiny.

Fair Lending

“In general, we have observed that guidelines on Key Facts Statement (KFS) are followed, but a few regulated entities still charge fees, etc. that are not specified or disclosed in the KFS,” RBI governor Shaktikanta Das said in a statement on Friday, on a day the central bank's monetary policy committee kept the repo rate unchanged at 6.5%. “It has also been observed in some microfinance institutions and NBFCs that the interest rates on small-value loans are high and appear to be usurious.”

A key fact statement shows borrowers the true cost of their debt and, as per RBI, should include details of the annual percentage rate, and recovery mechanism, among others.

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Das cautioned that the regulatory freedom enjoyed by the lenders in pricing of loans should be used judiciously. “The Reserve Bank continues its constructive engagements with such financial entities to safeguard the interest of customers and ensure overall financial stability.”

“Interest rates of banks, non-bank lenders and microfinance institutions are completely deregulated and RBI’s guideline is that rates must be fair and transparent,” Das said at a post-policy press conference.

He said that it is not the entire system that is at fault, but there are some outliers where the regulator has seen such instances. “Wherever we have noticed this, our supervision department is directly in touch with them. We are asking these entities on what basis they are charging such interest rates and are sensitising them so that their rates are fair.”

Expert Views

Industry experts said that the cost of lending is dependent upon the cost of funds being raised by microfinance lenders.

Jiji Mammen, executive director and chief executive of MFI industry body Sa-Dhan, said that the organisation has been keeping a close watch on the issue of pricing. “As we understand, the loan pricing is linked to their cost of borrowing and wherever the MFIs are able to access cheaper funds, they are able to lend at comfortable levels. We have been making efforts to create a dedicated mechanism for raising affordable funding for all MFIs,” said Mammen.

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He added that smaller MFIs often depend on NBFC for funds, which cost them more and this translates to higher lending rate. Gross loan portfolio of all micro lenders – including banks and MFIs – was at ₹3.9 trillion as on 31 December, as  per data from Sa-Dhan, up 21% from the same period last year. 

Others saw RBI’s warning as an extension of the central bank's push to safeguard customer interests. Suresh Ganapathy, managing director and head of financial services research at Macquarie Capital, said in an email to clients that clearly customer protection is on top of RBI’s mind. “If fintechs or anyone for that matter feel that they can get away by exploiting the loopholes and being less transparent – watch out, the regulator will come down heavily on you,” said Ganapathy.