The Reserve Bank of India (RBI) has recently floated two draft rules that could change how fintech firms offer small loans. One sets a common loan-pricing framework, while the other would restrict lending of non-banking financial companies (NBFCs) to term loans instead of revolving credit.<\/p>\n
These norms could have a bearing on fintechs with NBFC licences and lending service providers (LSPs). Mint explains how the rules could change the way fintechs price, structure and distribute small loans.<\/p>\n
The draft interest-rate directions, released on 12 August, would require RBI-regulated lenders to follow a board-approved policy for setting loan rates. These loan rates would have two parts: a benchmark, or the lender\u2019s base reference rate, and a risk-based spread, which is the extra rate charged for factors such as a borrower\u2019s repayment history or income profile.<\/p>\n
For microfinance and personal loans of up to \u20b950,000, lenders would set an upper limit on the annual percentage rate (APR), which includes interest and all fees. RBI has not proposed a numerical cap, but says the ceiling must not be usurious. Interest would be calculated daily on unpaid principal and posted monthly. Comments have been sought on the draft by 11 September. If finalized, the directions would take effect on 1 April 2027.<\/p>\n
The second draft, issued on 6 August, proposes a more fundamental change in how the NBFCs offer credit. They will be allowed to offer only term loans, which are fixed amounts repaid on a pre-set schedule. If a borrower repays part of a term loan, that amount cannot be borrowed again under the same facility.<\/p>\n
The pricing proposal follows years of borrower complaints about opaque pricing and coercive recovery in app-based lending.<\/p>\n
Rohit Jain, managing partner at Singhania & Co., said it appears to target high-cost loans. \u201cFrom my reading of the draft, it is responding to loans offered by some micro-lending apps at high APRs of 400-500%,\u201d he said.<\/p>\n
The draft shifts responsibility to lenders\u2019 boards to set and defend APR ceilings. \u201cThe aim is to address arbitrary pricing,\u201d Jain said.<\/p>\n
A Mint investigation in June found borrowers seeking emergency cash were routed through downloadable apps and browser-based loan pages to multiple NBFCs. Loans carried upfront deductions of 8-15% and tenures of 15-30 days. For instance, a Ram Fincorp loan sanction letter reviewed by Mint for a \u20b930,000, 26-day loan listed \u20b93,540 in upfront charges and total repayment of \u20b941,340, an APR of more than 600%.<\/p>\n
Amey Pathak, partner and head of banking at Cyril Amarchand Mangaldas, said the proposed norm would bring NBFC pricing closer to the bank framework.<\/p>\n
For NBFCs, Pathak said, \u201cthe RBI presently regulates only the processes to be adopted and the disclosures to be made and leaves the rate to be prescribed by the board of the respective NBFC with justifiable reasons.\u201d<\/p>\n
\u201cThe draft framework does not prohibit risk-based pricing, but in the sub- \u20b950,000 band it replaces price-based risk management with underwriting-based risk management,\u201d Pathak said. This means lenders may have to assess repayment ability more closely, rather than use very high rates to offset risk across a broad group.<\/p>\n
Rajat Deshpande, co-founder and chief executive of FinBox, a credit-decisioning company, said lenders would need "a more sophisticated system\u201d to assign borrowers a risk profile and show RBI how a rate was set.<\/p>\n
Fintechs and NBFC partners use credit lines, flexi-loans and pay-later facilities. A customer with a \u20b910,000 limit may borrow \u20b92,000, repay it and borrow the same amount again without a new loan.<\/p>\n
\u201cEssentially, any facility that lets a borrower repay and then draw funds again without fresh underwriting would be revolving credit, under a broad reading,\u201d said Siddharth Manchanda, partner at JSA Advocates & Solicitors.<\/p>\n