Digital lenders, microfinance companies urge RBI to set interest rate formula for small loans

This follows a ban imposed by the RBI in October on a few non-bank financing companies, including Navi Finserv, Asirvad Micro Finance and Arohan Financial Services, citing concerns over excessive pricing and significant mark-ups above funding costs. Lenders argue that a regulatory formula for setting interest rates would help ensure fair pricing, prevent disruptions to business and reduce the risk of regulatory actions.

“We are in discussions with the regulator, urging them to issue guidelines and a framework on how to determine the appropriate level of interest rates we can charge borrowers,” said the chief executive of a digital lending firm. “Industry associations and individual companies have made multiple requests for more clarity on what is acceptable and what is not.”

Another lender suggested that such a framework could be modelled after practices in other countries.

“A framework needs to be provided, such as a formula to calculate the appropriate interest rates,” he said. “This is not impossible. If you look at Hong Kong and Australia, they have managed to do it. We understand the regulator may not want to define a fixed rate, but a clear methodology will help us avoid business interruptions.”

While the RBI lifted the ban imposed in October, the regulator’s move has caused concerns in the industry.”Banning and halting business operations should be an absolute last resort, used only when all other measures have failed,” said another lender. “The industry feels that business stoppages are being used too frequently as a solution. More could have been done by the regulator before resorting to a ban.”In December 2024, the RBI emphasised that non-bank finance firms should avoid a “growth at any cost” approach. “An imprudent ‘growth at any cost’ approach would be counterproductive, and a robust risk management framework should be implemented,” the RBI stated in its report on the Trends and Progress of Banking in India.