The Reserve Bank of India (RBI) is set to introduce a unified interest rate framework for Non-Banking Financial Companies (NBFCs), aligning them more closely with the norms followed by banks. This move aims to improve the transmission of monetary policy changes to borrowers and enhance transparency in loan pricing.
Currently, when RBI adjusts the benchmark repo rate, banks quickly reflect these changes in floating-rate loans. However, NBFCs, including housing finance companies, often delay such adjustments or do so in a less transparent manner. Highlighting this regulatory inconsistency, RBI stated, “The extant regulations on interest rates on advances vary across all regulated entities. To harmonise the same, a comprehensive review of the current regulatory instructions is underway.”
To bridge this policy gap, RBI has been holding internal consultations and discussions with industry stakeholders. As part of its efforts to ensure transparency and accountability, the central bank plans to release a discussion paper inviting public feedback on the proposed harmonised interest rate regime across all regulated lending entities.
Current System Lacks Standardisation
Experts point out that banks use well-defined interest rate mechanisms such as the repo-linked lending rate and the Marginal Cost of Lending Rate (MCLR), which allow the RBI to monitor rate transmission effectively. In contrast, NBFCs rely on outdated models like the Prime Lending Rate (PLR), resulting in less clarity on how rates are set.
“NBFCs don’t have repo-linked or MCLR-based loans and instead use legacy PLR systems,” noted Suresh Ganapathy of Macquarie. “This lack of transparency makes it crucial to introduce proper alignment in interest rate mechanisms.”
Strengthening NBFC Supervision and KYC Compliance
In addition to interest rate reforms, RBI is reviewing its supervisory framework for NBFCs. One of the key focus areas is enhancing the risk-based supervision of these entities, particularly in relation to compliance with anti-money laundering (AML) and Know Your Customer (KYC) regulations. The RBI aims to assess whether NBFCs are effectively implementing the KYC framework, especially in firms considered high-risk.
Focus on Consumer Protection and Risk-Based Oversight
To protect borrowers, the RBI plans to conduct thematic reviews to ensure NBFCs adhere to fair interest rate practices and do not impose excessive charges. The regulator also intends to expand the scope of risk-based supervision, tailoring regulatory oversight based on the size, complexity, and risk profile of individual NBFCs.
Simplification of Foreign Exchange and Rupee Lending Norms
As part of its broader regulatory reforms, the RBI is also looking to simplify rules related to borrowing and lending in Indian rupees. Moreover, it is working to streamline the approval process for companies involved in foreign exchange transactions under India’s FEMA (Foreign Exchange Management Act).
Conclusion
RBI’s proposed interest rate harmonisation and enhanced supervision of NBFCs mark a significant step toward financial sector reform. These initiatives aim to promote fairness, boost market transparency, and ensure that monetary policy changes are efficiently passed on to borrowers, thereby strengthening the overall financial ecosystem.