The Reserve Bank of India (RBI) has directed large non-banking financial companies (NBFCs) to disclose the total charges levied on customers for each loan product.
RBI’s move appears to be aimed at preventing excessive interest rates and ensuring fair lending practices among NBFCs amid the increasing household debt levels.
According to a media report, these NBFCs must obtain board approval for the maximum rates they set on loans.
Consequently, finance companies will be required to transparently outline the upper limit of charges — comprising interest rates, insurance, processing fees, and any other applicable costs — across different loan categories, including mortgages, vehicle loans, property loans, gold loans, and education loans.
Furthermore, once the board approves these rates, any subsequent increase in total charges would require board re-approval.
Many NBFCs are expected to submit a rate matrix to the RBI, considering various factors such as borrowers’ credit scores, loan-to-value ratios, repayment capacity, loan tenure, and prevailing market and liquidity conditions.
Under the current arrangement, the NBFC boards must establish an interest rate framework considering costs, margins, and risk premiums.
It mandates that both the applicable interest rate and the rationale for charging different rates to various borrower categories be clearly disclosed in the loan application and communicated explicitly in the sanction letter.