RBI flags 'usurious' interest rates on small loans by NBFCs

Reserve Bank of India (RBI) governor Shaktikanta Das on Friday said there are some micro finance institutions and non-banking financial companies which charge usurious interest rates on small value loans.

There are some outliers that are charging usurious interest rates with whom RBI’s supervisory department is engaged, Das says, adding that interest rates should be fair and transparent.

Out of 9,500 NBFCs, supervisory action has been taken on three, Das says.

It has been observed in some micro finance institutions and NBFCs that the interest rates on small value loans are high and appear to be usurious, says Das.

“The regulatory freedom enjoyed by the regulated entities in respect of interest rates and charges should be used judiciously to ensure fair and transparent pricing of products and services. The Reserve Bank continues its constructive engagements with such financial entities to safeguard the interest of customers and ensure overall financial stability,” Das says.

“Customer protection remains on top of the Reserve Bank’s priorities. In general, we have observed that guidelines on Key Facts Statement (KFS) are followed, but a few REs still charge fees, etc. that are not specified or disclosed in the Key Facts Statement (KFS),” he says.

The RBI monetary policy committee decided to maintain the status quo on repo rate at 6.5%. This is the eighth time in a row that the RBI committee has decided to keep the repo rate unchanged.

Out of six members of the MPC, four voted in favour of having a status quote on the key lending rates, while two voted otherwise.

RBI’s decision to hold rates steady this time was driven by conditions that allow it to continue to focus on containing inflation as more-stable-than-expected economic growth continues, says Ryota Abe, economist, Global Markets and Treasury Department, Asia Pacific Division at Sumitomo Mitsui Banking Corporation (SMBC).

“Going forward, food prices will be vulnerable to weather risks such as monsoon rainfall. At present, RBI maintains its forecast for headline inflation, based on forecasts that monsoon precipitation will be normal this year. However, there have been reports about heat wave in India, leading to growing concerns that food prices may rise globally in the short term,” says Abe.

RBI governor Das said inflation is expected to fall below 4% in the second quarter of 2024-25 but that may not lead to a repo rate cut because inflation is again expected to rise in the succeeding quarter to 4.7%. The last mile of our journey towards 4% inflation target is pretty sticky, says the RBI governor during the post monetary policy press conference. “When we have confidence that inflation will stick to 4% and not go up, then we will act on further monetary policy action,” Das says.