Interest Rates & Gradation of Risk


The Reserve Bank vide its master circular dated September 28, 2006, issued guidelines on Fair Practices Code (FPC) for all NBFCs to be adopted by them while doing lending business. The guidelines inter alia, covered general principles on adequate disclosures on the terms and conditions of a loan and also adopting a non-coercive recovery method. The same was revised in view of the recent developments with sector including creation of New Category of NBFCs viz; NBFC-MFI and also the rapid growth in NBFCs lending against gold jewelry. Revised circular RBI/2015-16/16 DNBR (PD) CC.No.054/03.10.119/2015-16 dated 1st July 2015.

Regulation of excessive interest charged by NBFCs

(a) The Board of each NBFC shall adopt an interest rate model taking into account relevant factors such as cost of funds, margin and risk premium and determine the rate of interest to be charged for loans and advances. The rate of interest and the approach for gradations of risk and rationale for charging different rate of interest to different categories of borrowers shall be disclosed to the borrower or customer in the application form and communicated explicitly in the sanction letter.

(b) The rates of interest and the approach for gradation of risks shall also be made available on the web-site of the companies or published in the relevant newspapers. The information published in the website or otherwise published should be updated whenever there is a change in the rates of interest.

(c) The rate of interest should be annualized rate so that the borrower is aware of the exact rates that would be charged to the account.

Rate of interest:
The rate of interest of the Company is effectively communicated to the borrowers through a Compulsory Group Training which is conducted with an aim to educate the borrowers articulating all the pre-requisites for availing a loan. The effective rate of interest charged and the grievance redressal system set up by the NBFC-MFI is prominently displayed in all its offices and in the literature issued by it (in vernacular language) and on its website. The same is reflected in the loan cards of the borrowers and is communicated at the time of sanction of the loan along with the tenure and amount of the monthly installment.
Approach for gradation of risk:

The rate of interest is arrived at based on the weighted average cost of funds, administrative costs, risk premium and profit margin. The decision to give a loan is assessed on a case to case basis, based on multiple parameters such as borrower profile and repayment capacity, borrower’s other financial commitments, past repayment track record if any, tenure of the loan, geography (location) of the borrower, end use of the asset etc. Such information is collected based on borrower inputs and field inspection by the company officials.

As per RBI Guidelines:

i. The margin cap for all NBFCs irrespective of their size was 12 per cent till March 31, 2014. However, with effect from 1st April, 2014 margin caps as defined by Malegam Committee may not exceed 10 per cent for large MFIs (loans portfolios exceeding Rs.100 crore) and 12 per cent for the others.

ii. With effect from the quarter beginning April 01, 2014, the interest rates charged by an NBFC-MFI to its borrowers will be the lower of the following:

A ) The cost of funds plus margin as indicated in para (i) above; or

B.) The average base rate of the five largest commercial banks by assets multiplied by 2.75. The average of the base rates of the five largest commercial banks shall be advised by the Reserve Bank on the last working day of the previous quarter, which shall determine interest rates for the ensuing quarter. The table below shows the applicable base rates:

Quarter beginning with Quarter, FY Avg. of base rates of 5 largest commercial banks (%) Link Avg. of base rates X 2.75 (%)
Circular dated Feb, 7 , 2014 Click Here
Quarter beginning July 1, 2014 Q2, 2014-15 10.09 Click Here 27.75
Quarter beginning Oct 1, 2014 Q3, 2014-15 10.09 Click Here 27.75
Quarter beginning Jan 1, 2015 Q4, 2014-15 10.09 Click Here 27.75
Quarter beginning April 1, 2015 Q1, 2015-16 10.09 Click Here 27.75
Quarter beginning July 1, 2015 Q2, 2015-16 9.89 Click Here 27.2
Quarter beginning Oct1, 2015 Q3, 2015-16 9.82 Click Here 27.01
Quarter beginning Jan 1, 2016 Q4, 2015-16 9.45 Click Here 25.99
Quarter beginning Apr 1, 2016 Q1, 2016-17 9.44 Click Here 25.96
Quarter beginning July 1, 2016 Q2, 2016-17 9.44 Click Here 25.96
Quarter beginning Oct 1, 2016 Q3, 2016-17 9.44 Click Here 25.96
Quarter beginning Jan 1, 2017 Q4, 2016-17 9.41 Click Here 25.88
Quarter beginning Apr 1, 2017 Q1, 2017-18 9.35 Click Here 25.71
Quarter beginning July 1, 2017 Q2, 2017-18 9.22 Click Here 25.35
Quarter beginning Oct 1, 2017 Q3, 2017-18 9.06 Click Here 24.915
Quarter beginning Jan 1, 2018 Q4, 2017-18 8.96 Click Here 24.64
Quarter beginning April 1, 2018 Q1, 2018-19 8.99 Click Here 24.72
Quarter beginning July 1, 2018 Q2, 2018-19 8.92 Click Here 24.53

The rates of interest are subject to change as the situation warrants and are subject to the discretion of the management.