RBI directs NBFCs to disclose maximum loan charges, seek board approval
New Delhi, Feb 6, 2025
The RBI has directed large NBFCs to disclose total loan charges, including interest and fees, and mandates board approval for maximum rates to enhance transparency and fair lending practices
The Reserve Bank of India (RBI) has directed large non-banking financial companies (NBFCs) to disclose the total charges levied on customers for each loan product.
Additionally, these NBFCs must obtain board approval for the maximum rates they set on loans. Consequently, finance companies will be required to transparently outline the upper limit of charges — comprising interest rates, insurance, processing fees, and any other applicable costs — across different loan categories, including mortgages, vehicle loans, property loans, gold loans, and education loans, according to a report by The Economic Times.
With household debt levels increasing, this measure appears aimed at preventing excessive interest rates and ensuring fair lending practices among NBFCs, which have played a significant role in driving retail loan growth in recent years.
The news report quoted a senior industry official as saying that while the RBI operates under a free interest rate regime and does not impose caps, there is implicit oversight. Since NBFCs must explicitly state the highest charge applicable to each loan type, they will be bound by it and unable to exceed the disclosed rates, the official said.
Furthermore, once the board approves these rates, any subsequent increase in total charges would require board re-approval.
However, many NBFCs are expected to submit a rate matrix to the RBI, considering various factors such as borrowers’ credit scores, loan-to-value ratios, repayment capacity, loan tenure, and prevailing market and liquidity conditions.
The Economic Times quoted a source as saying that there is a possibility that the regulator suspects certain NBFCs are not fully transparent about the final rates charged to borrowers. If so, this could be seen as a violation of its ‘fair practices code’, the source said. Officials of the banking regulator have held meetings with multiple NBFCs on this.
As per the code, which has been in place for years, NBFC boards must establish an interest rate framework considering costs, margins, and risk premiums. The code further mandates that both the applicable interest rate and the rationale for charging different rates to various borrower categories be clearly disclosed in the loan application and communicated explicitly in the sanction letter.
Although India’s household debt remains lower than other emerging economies, the RBI has pointed out an upward trend over the past three years.
A September 2024 report by credit rating agency CARE revealed that household financial liabilities reached 5.8 per cent of GDP in FY23 — the highest level in 16 years — compared to the pre-pandemic average of 3.4 per cent. While increased borrowing for housing investment may not pose an immediate risk, CARE emphasised the need to closely monitor the expansion of unsecured lending facilitated by NBFCs and fintech firms, the news report said.
[The Business Standard]
