RBI warns MFIs, NBFCs against usurious pricing of small ticket loans

The governor further said it is in everyone’s interest that financial entities safeguard the interest of customers even as they ensure overall financial stability.
Reserve Bank of India
Reserve Bank of India (File Photo | PTI)

MUMBAI: Stating that public interest is a top priority for the Reserve Bank, governor Shaktikanta Das has warned some microlenders and non-bank lenders against their usurious lending practices in general and particularly when it comes to small ticket borrowers—something the industry body admits to be done by a few section of its members.

“Customer protection remains on top of the Reserve Bank’s priorities. In general, we’ve 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. It has also been observed in some micro finance institutions and NBFCs that the interest rates on small value loans are high and appear to be usurious,” Das said Friday while unveiling the monetary policy wherein he left all key rates unchanged for the eighth time in the trot.

When contacted Sadaf Sayeed, the chief executive of Muthoot Microfin, which is among the top players and recently went public, and who is also on the board of the microlenders self-regulatory organization Sadhan, said the governor’s comment should be read as directional.

“A couple of months back the RBI called us for a meeting on the higher interest rates issue, which to be factual is charged being charged only by around 5 percent of our members. Over 95 percent of the members charge 24 percent which is below the peak rate of 26 percent prescribed by the YH Malegam committee,” Sayeed told the TNIE over phone.

He said these 5 percent of the MFIs is charging around 28 percent, on average, which is the reason for the concern raised by the governor.

Following the meeting with RBI officials, we have sent show-cause notice to these members, but they haven’t acted upon yet. So will have to send them a reminder, he added.

In 2010, after the crisis in the MFI industry following the Vikram Akula’s SKS Microfinance scandal, the RBI appointed a panel under YH Malegam, who was once on the central board of the RBI, to review the microfinance sector in response to the growing concerns about the practices of microfinance institutions and the impact they were having on the livelihoods of poor borrowers.

The major recommendations of the Malegam panel were capping the interest rates at 2.75x of the base rate of the top five banks (means it should be reasonable and affordable for borrowers), and that the margin cap (difference between the cost of funds and the lending rate) should not exceed 10 percent. Later RBI finetuned this and capped the rates at 26 percent.

Calls to the NBFC lobby FSIDC did not elicit any response.

The governor further said it is in everyone’s interest that financial entities safeguard the interest of customers even as they ensure overall financial stability.

“The regulatory freedom enjoyed by the lenders in respect of interest rates and charges/fees should be used judiciously to ensure fair and transparent pricing of products and services. Das said further.

The KSF issued last month contains key facts of a loan agreement, in simple and easier to understand language, and is provided to the borrower in a standardised format. It includes a computation sheet of annual percentage rate and the amortisation schedule of the loan over the loan tenor. It also asks lenders to disclose to the borrower all third-party charges recovered from the borrower on actual basis also form part of the APR and disclosed separately.

On the impact of the last November’s action by RBI to contain the bubbly growth of unsecured loans wherein it has increased the risk weighted capital for such loans by 25 percentage points to 125 percent, Das said “we had flagged certain concerns on excessive growth in the unsecured retail loans and over-reliance of NBFCs on bank funding. Recent data suggests that there is some moderation in these loans and advances… Credit growth in unsecured personal loans such as credit card outstanding declined from 34.2 per cent in November 2023 to 23 percent in April 2024, while bank credit growth to NBFCs declined from 18.5 percent in November 2023 to 14.4 per cent in April 2024.”

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