RBI looking at how NBFCs, housing finance cos fix their lending rates

After instructing all the banks to anchor the interest rates on their loan products to an external rate to ensure transparency, the Reserve Bank of India is looking at a similar system for the other lending institutions like the non-banking finance companies (NBFCs) and housing finance companies (HFCs). These two categories are not directly under the purview of the central bank and have the freedom to fix rates as long as they stick to the guidance rates announced by the RBI. The regulator has set in motion an internal exercise to decide if there is a need for such a directive to the NBFCs and HFCs as well.

The system of linking loans to external benchmark rates is set to come into force beginning this October 1.

One source said to be aware of what went on in this internal meeting at RBI, says the sense among those present was that the first step may be to bring some order in the lending pattern by these players. At present they don’t even have the MCLR (marginal cost of funds-based lending rate) regime in place yet. It may be essential to bring these institutions to that level and then the subsequent stages envisaged. One must hasten to add here that these are just internal kite-flying exercises and there is no firm decision on the issue. It may take quite a while before that happens.

The issue of rates of interest charged on loan products by banks has been a bone of contention for a fairly long period ever since the individual banks were permitted to fix their lending rates. This happened in 1994. There have been several benchmarks in these two and half decades like BPLR and MCLR. Only now has the RBI insisted on the banks following an external benchmark. RBI, on its part, says it wants to bring in more transparency. The larger question of how the banks will recover their cost of servicing these loans and other incidental expenses still remains unanswered.

Housing finance companies usually keep their interest rates low, just above 8% to attract customers. The property becomes the security and there is a natural appreciation in the value of the asset.

It may not be long before the NBFCs and HFCs are brought fully under the control of the Reserve Bank of India for all matters.