Interest Rate Policy

2. Objective

The objective of the Interest Rate Policy is to:

• Ensure transparency in the determination and disclosure of interest rates and associated charges.
• Provide a framework for fair pricing of loans to borrowers based on their credit profile and risk assessments.
• Comply with the RBI’s regulatory framework for interest rates and associated fees to promote fair lending practices.
• Protect the consumer’s rights by avoiding exploitative lending practices and ensuring access to affordable credit.

3. Guiding Principles

3.1. Transparent Disclosure

• Interest Rate Disclosure: NBFCs must disclose the applicable interest rates in a clear, transparent, and accessible manner. All terms related to interest rates, such as annualized rate, processing fees, penalties, and prepayment charges, should be made available to borrowers before the loan is sanctioned.
• Annual Percentage Rate (APR): The APR (which includes the interest rate and all associated fees) should be clearly disclosed to the borrower to help them understand the total cost of the loan over its lifetime.

3.2. Fair Lending Practices

• No Usurious Rates: NBFCs must avoid exorbitant or unjustifiably high interest rates that may result in exploitation of borrowers.
• Interest Rate Adjustments: Any changes in interest rates (either for existing loans or new ones) should be communicated to the borrower well in advance with adequate justification.

3.3. Risk-based Pricing

• The interest rate must be aligned with the borrower’s risk profile. Factors such as the borrower’s credit score, income level, loan amount, and tenure should be used to assess the risk associated with lending.
• Higher Risk = Higher Interest Rates: Borrowers with a higher risk of default (e.g., low credit scores, unsecured loans) may be charged higher rates, reflecting the risk posed to the lender

3.4. No Discriminatory Practices

• Interest rates and loan terms must be consistent and non-discriminatory. Discriminatory pricing based on gender, race, religion, caste, or any other arbitrary factors is strictly prohibited.

4. Methods for Calculating Interest Rates

• NBFCs may use various methods to calculate interest on loans. These include:
• Flat Rate Method: Under this method, interest is calculated on the full principal amount throughout the tenure of the loan.
• Reducing Balance Method: The interest is calculated on the outstanding balance after every repayment. This is generally considered more transparent and fairer to the borrower.
• Annual Percentage Rate (APR): The APR method considers the total cost of borrowing over the loan tenure, including both interest rates and any additional charges such as processing fees.

5. Principles for Determining Interest Rates

5.1. Weighted Average Cost of Funds/Borrowings

The interest rate should reflect the cost of funds for the Company. This includes the expenses associated with borrowing money, whether from financial institutions, markets, or through other sources. The rate charged should help the Company cover these costs and earn a reasonable profit. The factors contributing to the cost of funds include:

• Borrowing Costs: The rate at which the Company borrows funds, including interest on borrowed funds.
• Operational Costs: Costs related to running the lending business, such as administrative, regulatory, tech cost, credit cost and legal costs.

5.2. Risk-Based Pricing

Interest rates will be influenced by the credit risk profile of the borrower. Factors like credit score, income stability, debt-to-income ratio, loan amount, and tenure will be considered. Loan Default

5.3. Loan Characteristics

The type of loan (secured vs. unsecured), loan amount, loan tenure, and purpose will impact the interest rate. Unsecured loans and loans with a higher risk profile will generally attract higher interest rates.

The range of interest rate given above has been arrived at based on indicative parameters given below:

6. Maximum and Minimum Interest Rate Guidelines

6.1. No RBI-Imposed Cap on Interest Rates

• RBI does not impose a cap on the maximum interest rate that can be charged by NBFCs, as it believes in promoting market-based pricing of loans.
• However, NBFCs are required to ensure that their interest rate policy is fair, transparent, and reasonable.

6.2. Minimum Interest Rate

While RBI does not specify a minimum interest rate, the rates should be reasonable and should take into account the cost of funds and the operational expenses of the NBFC.

6.3. No Usurious Interest Rates

NBFCs should not charge interest rates that can be considered usurious (i.e., excessively high). Rates should be justifiable based on the loan’s risk profile and in line with the market conditions.

7. Processing Fees and Other Charges

7.1. Processing Fees

• NBFCs may charge processing fees for loan applications. These fees should be clearly disclosed at the time of loan application.
• The processing fee should be reasonable and must not exceed the maximum cap (if any) prescribed by RBI for specific types of loans.

7.2. Prepayment and Pre-closure Charges

Prepayment charges should be disclosed clearly to the borrower at the time of loan origination. These charges must be reasonable and should reflect the cost of processing the prepayment.

Prepayment penalties must be clearly specified in the loan agreement and should not be disproportionately high.

7.3. Late Payment Penalties

In case of delayed payments, NBFCs can impose a penalty as a percentage of the outstanding loan amount.

The penalty fees must be reasonable and should not exceed the actual loss incurred due to the delay. The penalties must be clearly communicated to the borrower.

9. Annual Review of Interest Rates

NBFCs must review their interest rate policies at regular intervals (preferably annually) to ensure that they reflect current market conditions, cost of funds, and regulatory requirements.

Any changes in the interest rates should be communicated to existing borrowers with prior notice.