NBFC Compliance

Reserve Bank of India to Observe the Lending Rate Mechanism of NBFCs


RBI is looking at “how Non-Banking Financial companies and Housing Finance Companies set their lending price for their loans, as the Central Bank is not likely to enforce benchmarks on NBFCs and HFCs” RBI is directing the commercial banks to link their loan rates to External Benchmarks. The matter related to this concern came up to at an internal discussion by setting External Benchmarks, which are binding on all the banks beginning from 1st October 2019. Now let’s discuss the lending rate mechanism of NBFCs in detail;

Key Highlights of RBI examination on Lending Mechanism of NBFCs

  • Focus on Greater Transparency

The central bank is focusing on greater transparency in the rate-setting process or lending mechanism at non-banking financial companies (NBFCs) and housing finance companies (HFCs), which are not bound by RBI regulations.

  • Setting the External Benchmarks

Reserve Bank of India is looking at setting the external benchmarks. The major issue that has come-up is as to what to do with the NBFC and HFC sector. As both the sectors (NBFCs and HFCs) are not even on the marginal cost of funds-based lending rate (MCLR)* regime, the focus was to first graduate both the sectors to some level and then think of setting the external benchmark.

  • RBI to bring some order determines the Rates

Now, RBI intends to bring some order to determine the rates, as at present there is no mandate from the Central bank to Non-Banking Financial Companies and housing finance companies:

  • No determination of the rates based on an anchor,
  • Also, there are no instructions on what the anchor should be or even how it should be calculated.
NOTE – For Instance, few HFCs (Housing Finance Companies) use prime lending rate as their benchmark for loans and offer loans at a discount to this rate.
  1. Housing Development Finance Corporation (HDFC) has an (RPLR)*Retail Prime Lending Rate of 16.75%, it offers floating rate home loans at rates ranging between 8.35-9.25%.
  2. LIC Housing Finance-14.7%
  3. Piramal Housing Finance-16.05%
  4. Dewan Housing Finance-19.42%
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What is MCLR?

MCLR (Marginal Cost of Funds based Lending Rate) is a system to determine the lending rates for commercial banks. On 1st April 2016, RBI implemented MCLR to determine rates of interests for loans. MCLR is an internal reference rate for banks to determine the interest they can levy on loans.

Loopholes of NBFCs and HFCs

  • Issue of transparency in Non-Banking Financial Companies rates and lack of clearance that NBFCs are not in the same market as the banks which has resulted in a lack of transparency.
  • Absence of RBI’s Control and regulatory Framework on Housing Finance Companies.
  • No mandate from the central bank to non-banks and housing finance companies to determine their rates.
  • Certain costs such as business strategy and operating costs were part of the anchor rate under the MCLR regime.

Key Points of the Union Budget passed for Non-Banking Financial Companies and Housing Finance Companies

The Finance Minister Nirmala Sitharaman had proposed an amendment to Section 45-IA of the RBI Act 1934 in the Finance Bill which empowers the central bank-

  • To supersede the board of Non-Banking Financial Companies (other than those owned by the government)
  • Enable resolution of financially troubled NBFCs through a merger or splitting them into viable and non-viable units called bridge institutions.
  • Additionally, the Central Bank can also now remove auditors, call for audit of any group company of an NBFC and can have a say over the compensation of the senior management.

Earlier only Non-Banking Financial Companies were under RBI’s ambit and Recently, the Central Bank’s regulatory jurisdiction was extended to HFCs only.

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Taking into consideration the loopholes and the crisis at non-banks last year, the Union budget in July expanded RBI’s regulatory span to include HFCs. Further, RBI said in August that Housing Finance Companies (HFCs) will be treated as a category of non-banks. Further, it will also release a revised regulatory framework for these entities.

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