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NBFC-MFI Pricing of Credit: New Interest Rate Cap

Current · Source: Reserve Bank of India · RBI/2013-14/482 · issued 07 Feb 2014 · ~2 min read
Quick answerRBI caps NBFC-MFI lending rates at the lower of cost-plus-margin or 2.75 times the average base rate of the five largest banks, effective April 1, 2014. This replaces earlier pricing norms.
The rule, in the simplest words
How it plays out — a real example

An NBFC compliance officer in Indore, Priya, works for an NBFC-MFI. On March 31, 2014, she checks the RBI's announcement of the average base rate of the five largest banks. She calculates 2.75 times that rate and compares it to her company's cost-plus-margin rate. Since the 2.75-times rate is lower, she updates her loan pricing system to charge that rate for all new microfinance loans starting April 1, 2014, ensuring her borrowers pay the lowest possible interest.

What changed

RBI revised the pricing of credit for NBFC-MFIs, effective from the quarter starting April 1, 2014. The new rule requires NBFC-MFIs to charge the lower of: (i) cost of funds plus margin as per earlier circulars, or (ii) 2.75 times the average base rate of the five largest commercial banks. The average base rate will be announced by RBI on the last working day of each quarter.

What it means for you

NBFC-MFIs must now cap their lending rates using a dual formula, ensuring rates are not excessive. This directly limits interest income and may compress margins for lenders with higher funding costs. Banks and NBFC-MFIs need to recalibrate pricing models and monitor quarterly base rate announcements from RBI.

What you must do

Who it affects

All NBFC-MFIs, Banks lending to or partnering with NBFC-MFIs, Microfinance borrowers, RBI supervision and compliance teams

❓ Common questions

Regulatory timeline

Built from our lineage records — each fact carries its provenance; missing history simply is not shown (never guessed).

How is the new interest rate cap calculated?

The cap is the lower of: (i) your cost of funds plus margin as per earlier RBI circulars, or (ii) 2.75 times the average base rate of the five largest commercial banks. RBI will announce that average base rate quarterly.

When does this change take effect?

The new pricing rule applies from the quarter starting April 1, 2014. RBI will announce the first average base rate on March 31, 2014.

What if my current rate is already below the cap?

You must still ensure your rate does not exceed the lower of the two caps. If your rate is already below both, no change is needed, but you must document compliance.

📜 Read the original circular — full text as issued by RBI
RBI/2013-14/482 DNBS (PD) CC.No.369/03.10.038/2013-14 February 7, 2014 All NBFC-MFIs Dear Sirs, ‘Non-Banking Financial Company-Micro Finance Institutions’ (NBFC-MFIs) – Directions – Modifications in “Pricing of Credit” Please refer to paragraph 6 of circular DNBS.(PD)CC.No.300/03.10.38/2012-13 dated August 3, 2012 modifying, inter alia, the provisions related to “Pricing of credit” as given in the notification DNBS. PD.No.234 / CGM (US)-2011 dated December 02, 2011. 2. On a review, it has been decided that the interest rates charged by an NBFC-MFI to its borrowers will be the lower of the following: i. The cost of funds plus margin as indicated in the company circular DNBS. (PD)CC.No.300/03.10.38/2012-13 dated August 3, 2012 read with circular DNBS(PD) CC.No.327/03.10.038/2012-13 dated May 31, 2013 ; or ii. The average base rate of the five largest commercial banks by assets multiplied by 2.75. The average of the base rates of the five largest commercial banks shall be advised by the Reserve Bank on the last working day of the previous quarter, which shall determine interest rates for the ensuing quarter. 3. The above instructions will come into effect from the quarter beginning April 01, 2014. The Bank will announce the applicable average base rate on March 31, 2014 and every quarter end thereafter. Yours faithfully, (N.S.Vishwanathan) Principal Chief General Manager
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2013-14/482 · issued 07 Feb 2014. The plain-English explanation above is BankPulse’s own independent summary.
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Who does what — compliance checklist
💻 IT / Systems
  • Update loan pricing systems and product documentation to reflect the new cap.
📜 Compliance
  • Calculate your current lending rates against both the cost-plus-margin formula and the new 2.75x base rate cap.
  • Prepare to adopt the lower of the two rates from April 1, 2014.
  • Track RBI's quarterly announcement of the average base rate of the five largest banks.
  • Train credit and compliance teams on the revised pricing framework.
Grouped from the action items above — a single circular may involve more than one team.
Worked example & action-note template

Example: if you are a Compliance officer at a bank this circular applies to (All NBFC-MFIs, Banks lending to or partnering with NBFC-MFIs, Microfinance borrowers, RBI supervision and compliance teams), your first concrete step on “NBFC-MFI Pricing of Credit: New Interest Rate Cap” is: “Calculate your current lending rates against both the cost-plus-margin formula and the new 2.75x base rate cap.” (RBI issued this 07 Feb 2014).

  1. Circular: RBI/2013-14/482 -- NBFC-MFI Pricing of Credit: New Interest Rate Cap
  2. Issued: 07 Feb 2014
  3. Action required: Calculate your current lending rates against both the cost-plus-margin formula and the new 2.75x base rate cap.
  4. Action required: Prepare to adopt the lower of the two rates from April 1, 2014.
  5. Action required: Track RBI's quarterly announcement of the average base rate of the five largest banks.
  6. Action required: Update loan pricing systems and product documentation to reflect the new cap.
  7. Action required: Train credit and compliance teams on the revised pricing framework.
  8. Owner: ____________ Target date: ____________
  9. Board/committee approval needed? Y / N
  10. Evidence filed in compliance register on: ____________
Built only from this circular’s own published fields — not legal advice; always confirm against the official RBI source.

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Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=8734&Mode=0 — Plain-English summary by BankPulse (bankpulse.ai), reviewed by our expert reviewer, CA Amit Jain. Independent platform, not affiliated with the Reserve Bank of India; is our own plain-English paraphrase, not RBI’s original wording.
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