RBI had deregulated the interest rate on advances charged by Scheduled Commercial Banks (SCBs) with effect from October 18, 1994, except for loans up to ₹2 lakh. Subsequently from 2010, Interest rate on all loans got deregulated with the introduction of base rate system. Interest rates on loans of NBFCs have always been deregulated except for NBFC-Microfinance Institutions (NBFC-MFIs). For NBFC-MFIs, the old regime had specified an interest rate cap which was lower of (i) a margin cap of 12% over cost of funds for smaller NBFC-MFIs with portfolio of less than ₹100 crore and 10% for others, and (ii) average base rate of the five largest commercial banks by assets multiplied by 2.75.

2. Presently, RBI has not prescribed any interest rate ceiling on the loans provided by banks and NBFCs. The interest rates charged by these regulated entities (REs) are determined by their internal Board approved policies within the contours of a broad regulatory framework. The regulations require that the interest charged on loans, especially small-value loans, should not be excessive. However, as mentioned in the Governor’s statement on June 7, 2024, it has been observed that the regulatory freedom provided to REs in respect of interest rates and charges has not been used judiciously.

3. In view of the above, it is felt that it may be appropriate to put in place guidelines/ regulations to curb such practices. We invite views/ comments on the way forward which could, inter alia cover aspects such as coverage of borrower segments prescription of threshold ceiling etc