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MUMBAI: The central bank cautioned lenders, especially in the microfinance space, from charging ‘usurious’ interest rates by exploiting the freedom the regulator offered after pushback from states in the past.

The RBI has observed that while most lenders adhere to guidelines regarding the Key Facts Statement (KFS), some continue to impose undisclosed fees and high-interest rates, especially on small-value loans provided by microfinance institutions (MFIs) and non-banking financial companies (NBFCs).

“In general, we have observed that guidelines on Key Facts Statement (KFS)49 are followed, but a few REs still charge fees, etc. that are not specified or disclosed in the Key Facts Statement (KFS),” RBI Governor Shaktikanta Das said. “It has also been observed in some microfinance institutions and NBFCs that the interest rates on small value loans are high and appear to be usurious. The regulatory freedom enjoyed by the REs in respect of interest rates and charges should be used judiciously to ensure fair and transparent pricing of products and services.”

The key fact statement is designed to provide borrowers with essential loan information in a standardized, easy-to-understand format. It includes details such as the annual percentage rate (APR), an amortisation schedule, and all third-party charges, which are to be disclosed separately.

RBI started regulating interest rates and fees and other charges levied by MFIs from 2012. In 2011 SKS and many MFIs had gone out of business after the Andhra Pradesh state government promulgated a law that curbed their loan recovery process following complaints of harassment of borrowers that led to suicides.

Thereafter, the RBI appointed a committee headed by Y.H. Malegam. The panel recommended a cap on interest rates, among other things which is acceptable to some companies despite the fact that it slashes the usurious profitability they enjoyed before. In 2012, the government passed the Microfinance Bill, bringing all MFIs under the regulation of the RBI and as part of the bill, regulating interest rates, fees and premiums charged by MFIs.

“The Reserve Bank continues its constructive engagements with financial entities to safeguard the interests of customers and ensure overall financial stability,” the RBI stated.

Last year, RBI increased risk weights on unsecured consumer credit and bank credit to NBFCs to prevent potential risks in these segments. This led to a decline in credit growth. Unsecured personal loans, including credit card outstandings, saw a reduction in growth from 34.2% in November 2023 to 23.0% in April 2024. Bank credit growth to NBFCs dropped from 18.5% in November 2023 to 14.4% in April 2024.

  • Published On Jun 8, 2024 at 08:51 AM IST

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