NBFC loan pricing under RBI lens

Banking regulator may mandate anchor rate

Updated - September 18, 2019 10:37 pm IST

Published - September 18, 2019 10:13 pm IST - Mumbai

Representational image. File

Representational image. File

After mandating banks to implement external benchmarking for retail loan pricing, the Reserve Bank is now looking at the loan pricing regime of non-banking finance companies to make the practice more transparent.

According to sources, the central bank is internally discussing the loan pricing mechanism of the non-banking sector. At present, there is no anchor rate for NBFCs, similar to banks, that is linked to the lending rate of a particular loan.

For example, banks have the marginal cost of fund based lending rate (MCLR) — the anchor rate — and all the loans are linked to such a rate. Earlier, the base rate acted as an anchor rate.

Banks were not allowed to lend below the base rate or the MCLR rate. Banks are allowed to add a spread, based on the risk assessment, to the anchor rate.

However, there is no such mandate for NBFCs to have an anchor rate to which all the loan rates are linked.

“There is no anchor rate for NBFCs.

“So, first, we have to see how they are pricing loans,” sources said, adding it would take some time before mandating an anchor rate for NBFCs.

Unresponsive to changes

It has often been noticed that lending rates of banks and NBFCs, including housing finance companies, are not responsive to changes in the RBI’s policy rate or the repo rate. As a result, the banking regulator has now mandated banks that floating rate retail loans for homes, vehicles and loans to small and medium enterprises should be linked to an external benchmark like repo rate or Government of India T-bills, for example.

The main objective behind linking loans to an external benchmark was for faster transmission of monetary policy rates, particularly in a declining interest regime. At the end of September 2018, the number of NBFCs registered with the Reserve Bank of India declined to 10,190 from 11,402 at the end of March 2018. Only a handful of large NBFCs are supervised by the banking regulator.

The consolidated balance sheet of NBFCs expanded in 2017-18 and also in 2018-19, helped by strong credit expansion. The profitability of NBFCs improved on the back of fund-based income, low NPA levels relative to banks and strong capital buffers, RBI had observed in a recent report.

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