What changed
RBI issued formal Directions under Section 45L of the RBI Act, 1934, replacing earlier advisory guidance. NBFCs must now have a board-adopted interest rate model considering cost of funds, margin, and risk premium. Rates and risk gradation must be disclosed to borrowers in application forms and sanction letters, published on the company website or in newspapers, and updated on changes. All rates must be annualised.
What it means for you
NBFCs can no longer set interest rates arbitrarily; boards must formally approve a transparent pricing framework. Lenders must clearly communicate to borrowers how rates vary by risk category, reducing the scope for hidden or excessive charges. This aligns NBFC practices with fair lending norms and enhances borrower protection. Non-compliance could invite supervisory action.
What you must do
- Ensure your board adopts a documented interest rate model covering cost of funds, margin, and risk premium.
- Disclose the rate of interest and risk gradation approach in loan application forms and sanction letters.
- Publish the rate structure and risk gradation on your website or in newspapers, and update it whenever rates change.
- Quote all interest rates to borrowers on an annualised basis in all communications.
Who it affects
All NBFCs (excluding RNBCs), Boards of NBFCs, Compliance and risk management teams, Borrowers of NBFCs
Does this circular apply to RNBCs?
No, the circular explicitly excludes RNBCs (Residuary Non-Banking Companies) from its scope.
What must be disclosed to borrowers?
The rate of interest and the approach for gradations of risk, along with the rationale for charging different rates to different borrower categories, must be disclosed in the application form and communicated in the sanction letter.
How should interest rates be quoted?
All interest rates must be annualised rates so that borrowers know the exact rate being charged.