Digital lenders, microfinance companies urge RBI to set interest rate formula for small loans

A number of digital lenders and microfinance firms have approached the Reserve Financial institution of India, asking it to introduce a method for calculating rates of interest on small-ticket loans.

This follows a ban imposed by the RBI in October on just a few non-bank financing firms, together with Navi Finserv, Asirvad Micro Finance and Arohan Monetary Providers, citing considerations over extreme pricing and important mark-ups above funding prices. Lenders argue {that a} regulatory method for setting rates of interest would assist guarantee truthful pricing, forestall disruptions to enterprise and scale back the danger of regulatory actions.

“We’re in discussions with the regulator, urging them to problem pointers and a framework on find out how to decide the suitable stage of rates of interest we are able to cost debtors,” stated the chief govt of a digital lending agency. “Trade associations and particular person firms have made a number of requests for extra readability on what is appropriate and what’s not.”

One other lender recommended that such a framework could possibly be modelled after practices in different international locations.

“A framework must be supplied, similar to a method to calculate the suitable rates of interest,” he stated. “This isn’t inconceivable. For those who have a look at Hong Kong and Australia, they’ve managed to do it. We perceive the regulator might not wish to outline a set fee, however a transparent methodology will assist us keep away from enterprise interruptions.”

Whereas the RBI lifted the ban imposed in October, the regulator’s transfer has induced considerations within the trade.”Banning and halting enterprise operations must be an absolute final resort, used solely when all different measures have failed,” stated one other lender. “The trade feels that enterprise stoppages are getting used too continuously as an answer. Extra may have been completed by the regulator earlier than resorting to a ban.”In December 2024, the RBI emphasised that non-bank finance corporations ought to keep away from a “development at any price” method. “An imprudent ‘development at any price’ method can be counterproductive, and a sturdy danger administration framework must be applied,” the RBI acknowledged in its report on the Tendencies and Progress of Banking in India.