{"id":24798,"date":"2019-09-20T17:33:05","date_gmt":"2019-09-20T12:03:05","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=24798"},"modified":"2020-06-26T13:17:33","modified_gmt":"2020-06-26T07:47:33","slug":"rbi-to-observe-the-lending-rate-mechanism-of-nbfcs","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/rbi-to-observe-the-lending-rate-mechanism-of-nbfcs\/","title":{"rendered":"Reserve Bank of India to Observe the Lending Rate Mechanism of NBFCs"},"content":{"rendered":"<p class=\"has-drop-cap\">RBI is looking at <em>&ldquo;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&rdquo;<\/em> 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 1<sup>st<\/sup> October 2019. Now let&rsquo;s discuss the <strong><a href=\"https:\/\/enterslice.com\/learning\/lending-rules-for-nbfcs-under-reserve-bank-of-india\/\" target=\"_blank\" rel=\"noreferrer noopener\">lending rate mechanism of NBFCs <\/a><\/strong>in detail; <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Key Highlights of RBI examination on Lending\nMechanism of NBFCs<\/strong><\/h2>\n\n\n\n<ul><li><strong>Focus on Greater Transparency<\/strong><\/li><\/ul>\n\n\n\n<p>The central bank\nis focusing on greater transparency in the rate-setting process or lending\nmechanism at non-banking financial companies (NBFCs) and housing finance\ncompanies (HFCs), which are not bound by RBI regulations.<\/p>\n\n\n\n<ul><li><strong>Setting the External\nBenchmarks<\/strong><\/li><\/ul>\n\n\n\n<p>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 <strong><a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;NBFC&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;Non-Banking Financial Companies (NBFC) operate similarly to banks but do not possess the legal status of a bank. Registered under the Companies Act 2013 and governed by the RBI Act&amp;#039;s section(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/nbfc\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>NBFC<\/a><\/strong> and <strong>HFC<\/strong> 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.<\/p>\n\n\n\n<ul><li><strong>RBI to bring some order\ndetermines the Rates<\/strong><\/li><\/ul>\n\n\n\n<p>Now, RBI intends to bring some\norder to determine the rates, as at present there is no mandate from the Central\nbank to Non-Banking Financial Companies and housing finance companies:<\/p>\n\n\n\n<ul><li>No determination of the rates based on an anchor, <\/li><li>Also, there are no instructions on what the anchor should be or even how it should be calculated.<\/li><\/ul>\n\n\n\n<div class=\"shadow1\"><strong>NOTE &ndash;<\/strong> 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. <\/div>\n\n\n\n<ol><li>Housing\nDevelopment Finance Corporation (HDFC) has an (RPLR)*Retail Prime Lending Rate\nof 16.75%, it offers floating rate home loans at rates ranging between\n8.35-9.25%.<\/li><li>LIC Housing\nFinance-14.7%<\/li><li>Piramal Housing\nFinance-16.05%<\/li><li>Dewan Housing\nFinance-19.42%<\/li><\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What is MCLR?<\/strong><\/h2>\n\n\n\n<p>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. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Loopholes of NBFCs and HFCs<\/strong><\/h2>\n\n\n\n<ul><li>Issue of\ntransparency in Non-Banking Financial Companies rates and lack of clearance\nthat NBFCs are not in the same <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Market&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;A market is a structured environment, either physical or virtual, where buyers and sellers convene to trade goods and services. This trading hub operates based on the principles of supply and(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/market\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>market<\/a> as the banks which has resulted in a lack\nof transparency.<\/li><li>Absence of RBI&rsquo;s\nControl and regulatory Framework on Housing Finance Companies.<\/li><li>No mandate from\nthe central bank to non-banks and housing finance companies to determine their\nrates.<\/li><li>Certain costs\nsuch as business strategy and operating costs were part of the anchor rate\nunder the MCLR regime.<\/li><\/ul>\n\n\n\n<div class=\"read\"><p><b>Recommended Article:<\/b> <mark><a href=\"https:\/\/enterslice.com\/learning\/rbi-aadhaar-kyc-mechanism-for-banks\/\" target=\"_blank\" rel=\"noopener noreferrer\">RBI Allows e-KYC Mechanism for NBFCs and Banks\n<\/a><\/mark>.<\/p><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Key Points of the Union Budget passed\nfor Non-Banking Financial Companies and Housing Finance Companies<\/strong><\/h2>\n\n\n\n<p>The <strong>Finance Minister Nirmala Sitharaman<\/strong> had proposed an <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Amendment&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;An &amp;quot;amendment&amp;quot; refers to the formal change or correction of a legal document, often involving additions, variations, or deletions to address irregularities or clarify points in an agreement.(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/amendment\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>amendment<\/a> to Section 45-IA of the RBI Act 1934 in the Finance Bill which empowers the central bank-<\/p>\n\n\n\n<ul><li>To\nsupersede the board of Non-Banking Financial Companies (other than those owned\nby the government) <\/li><li>Enable\nresolution of financially troubled NBFCs through a merger or splitting them\ninto viable and non-viable units called bridge institutions.<\/li><li>Additionally,\nthe Central Bank can also now remove auditors, call for audit of any group\ncompany of an NBFC and can have a say over the compensation of the senior\nmanagement.<\/li><\/ul>\n\n\n\n<p>Earlier\nonly Non-Banking Financial Companies were under RBI&rsquo;s ambit and Recently, the\nCentral Bank&rsquo;s regulatory jurisdiction was extended to HFCs only. <\/p>\n\n\n\n<p>Taking into consideration the loopholes and the crisis at non-banks last year, the Union budget in July expanded RBI&rsquo;s regulatory span to include HFCs. Further, RBI said in August that <strong><a href=\"https:\/\/enterslice.com\/housing-finance-company-registration\">Housing Finance Companies<\/a><\/strong> (HFCs) will be treated as a category of non-banks. Further, it will also release a revised regulatory framework for these entities.<\/p>\n\n\n\n<div class=\"read\"><p><b>Also, Read:<\/b> <mark><a href=\"https:\/\/enterslice.com\/learning\/nbfc-recovery-mechanism\/\" target=\"_blank\" rel=\"noopener noreferrer\">Recovery Mechanism for NBFC: NBFCs Recovery Mechanism<\/a><\/mark>.<\/p><\/div>\n\n\n\n<p>The Author is an expert of terms related to <strong>Lending Rate Mechanism of NBFCs<\/strong>, click here to know more about him.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>RBI is looking at &ldquo;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&rdquo; RBI is directing the commercial banks to link their loan rates to External Benchmarks. The matter related to this concern came up [&hellip;]<\/p>\n","protected":false},"author":25,"featured_media":24822,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[3199],"tags":[2757],"acf":{"service_id":"57"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v14.6.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>RBI to Observe the Lending Rate Mechanism of NBFCs - Enterslice<\/title>\n<meta name=\"description\" content=\"RBI is likely to examine the lending rate mechanism of NBFC and HFC, while RBI is not likely to enforce benchmarks on NBFCs and HFCs.\" \/>\n<meta name=\"robots\" content=\"index, follow\" \/>\n<meta name=\"googlebot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<meta name=\"bingbot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/enterslice.com\/learning\/rbi-to-observe-the-lending-rate-mechanism-of-nbfcs\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"RBI to Observe the Lending Rate Mechanism of NBFCs - Enterslice\" \/>\n<meta property=\"og:description\" content=\"RBI is likely to examine the lending rate mechanism of NBFC and HFC, while RBI is not likely to enforce benchmarks on NBFCs and HFCs.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/enterslice.com\/learning\/rbi-to-observe-the-lending-rate-mechanism-of-nbfcs\/\" \/>\n<meta property=\"og:site_name\" content=\"Enterslice\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/enterslice\" \/>\n<meta property=\"article:published_time\" content=\"2019-09-20T12:03:05+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2020-06-26T07:47:33+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/09\/Lending-Rate-Mechanism-of-NBFCs.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1200\" \/>\n\t<meta property=\"og:image:height\" content=\"630\" \/>\n<meta name=\"twitter:card\" content=\"summary\" \/>\n<meta name=\"twitter:creator\" content=\"@enterslice\" \/>\n<meta name=\"twitter:site\" content=\"@enterslice\" \/>\n<!-- \/ Yoast SEO plugin. -->","authorName":"Priyanka Bajpayee","authorImageUrl":"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/09\/81216.jpg","authorDescription":"Priyanka Bajpayee has done Masters in International Business Law and well versed in content writing covering the area of legal and finance. Also, she has practical experience of almost 1.5 years in Legal compliance and secretarial work.","postViews":409,"readingTime":3,"nextPost":{"id":24801,"slug":"historic-tax-reform-reduction-in-corporate-taxes"},"prevPost":{"id":24480,"slug":"various-penalties-mentioned-under-section-2711c-income-tax-act-1961"},"featuredMediaUrl":"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2019\/09\/Lending-Rate-Mechanism-of-NBFCs.jpg","postTerms":"NBFC Compliance","_links":{"self":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts\/24798"}],"collection":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/users\/25"}],"replies":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/comments?post=24798"}],"version-history":[{"count":0,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts\/24798\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/media\/24822"}],"wp:attachment":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/media?parent=24798"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/categories?post=24798"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/tags?post=24798"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}