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
- 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.
- Update loan pricing systems and product documentation to reflect the new cap.
- Train credit and compliance teams on the revised pricing framework.
Who it affects
All NBFC-MFIs, Banks lending to or partnering with NBFC-MFIs, Microfinance borrowers, RBI supervision and compliance teams
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.