RBI-licensed NBFCs charging 600% annual interest legally
- RBI-licensed NBFCs charge up to 600% annual interest on loans.
- Such rates are board-approved and considered 'reasonable' under current rules.
- The practice is legal despite high costs to borrowers.
Loans with 600% interest: Legal and board-approved
Some RBI-licensed non-banking financial companies (NBFCs) charge annual interest rates as high as 600%. These rates are not rogue outliers. They are formally approved by the companies' boards and considered 'reasonable' under the current regulatory framework.
The Ken has reported that this practice is entirely legal. Despite the eye-watering cost for borrowers, the Reserve Bank of India does not set an upper limit on interest rates for NBFCs.
How 600% becomes 'reasonable'
NBFCs argue that high interest rates reflect the high risk of lending to borrowers with poor credit histories or no collateral. These loans are often small-ticket, short-term advances where administrative costs are proportionally high.
Companies cite operational expenses, default risks, and the lack of a formal credit profile for many customers. The board of each NBFC independently approves the rate structure, and as long as it is disclosed, the law is satisfied.
Regulatory gap leaves borrowers exposed
RBI guidelines for NBFCs focus on transparency, not pricing. Lenders must clearly state the annual percentage rate, but there is no cap. This contrasts with banks, where interest rates are linked to the repo rate or subject to regulatory scrutiny.
Consumer rights groups have flagged this gap. They argue that borrowers, often from low-income groups, do not fully understand the compounding effect of such high rates. A loan of a few thousand rupees can quickly balloon into a debt trap.
No immediate move to cap rates
RBI has not signalled any intention to introduce an interest rate ceiling for NBFCs. The central bank's stance has been that market forces and competition should determine pricing.
Industry insiders say that any cap would push many NBFCs out of business, cutting off credit to the very segments that formal banks avoid. The sector lends to millions who have no access to traditional banking.
The debate pits financial inclusion against consumer protection. As of now, the law sides with the lender.
What to watch: Whether rising defaults or political pressure force RBI to revisit its hands-off approach to NBFC interest rates.