There seems only one topic of heated debate in the world of NBFCs and fintechs the past one week - what constitutes fair interest rate to charge the borrowers? The worry around this is the question, “who would answer this ?”
An earlier master circular from the Reserve Bank of India (RBI) places the onus of determining the acceptable rate of interest on the Boards of its regulated entities. These Boards are to adopt an interest rate model based on factors such as the cost of funds, margin, and risk premium. In essence, they are instructed to set interest rates responsibly, disclose them transparently, and ensure that they are justifiable to different categories of borrowers. But, therein lies a grey area that leaves the industry both concerned and confused. It’s a tease, “kya ishaara kaafi hai ? “
For many lenders, including their investors and directors, this vague guidance is confusing, and of late, even worrying. While some lenders have been penalised for charging high interest rates, such as 40%, as we saw last week, many seemingly continue even now charging rates as high as 100% under the guise of serving hard-to-reach or high-risk borrowers.
It raises the question: Why are some players scrutinised for usurious lending practices, while others seemingly escape the regulatory net? Or is it just that the turn of the others breeching the regulatory line is yet not come with their supervision due ?
The industry angst is due to the reality that many of these lenders have poured significant investment into digital channels and expensive sourcing methods. They have raised rounds of capital, grown their balance sheets, and scaled their operations, and aiming to be becoming profitable, all while operating under an assumed regulatory framework that they now realise may not be as clear-cut as expected. The result? A growing worry that they might be punished for failing to adhere to a standard that hasn’t been explicitly set or known. There lies the grouse of many private investors who have pumped in monies, only now to observe that they didn’t know anything north of 40% is usury !
Hence the industry perception that is shaping stronger is that there could be certain unfairness to the current regulatory supervision. Without a formal guidance from the RBI, the heads of lending businesses are now seeking answers from their Boards and investors. How are they to balance operational costs, risk premiums, and regulatory compliance and provide the pitched return on their equity without clear direction? The question of how much interest to charge becomes a touchy topic, when it comes to fair-pricing the risk of lending.
The Idea
This issue might be effectively addressed if the RBI began offering informal advice upon request from regulated entities regarding their operational concerns.
Currently, there exists a significant gap that often hinges on the consulting or legal firms’ claims to have understanding of regulatory mood or on the personality and gravitas of the former regulatory talent, now in advisory avatar to many of these lenders, some providing even outdated guidance, leading to inconsistencies.
By formally permitting regulated entities to seek ‘informal guidance’—which would provide a broad range of what is deemed acceptable without appearing as micromanagement—the RBI could foster a more reliable framework. In cases where clear binary answers are possible, the regulator must be firm and specific in its directives. This type of ‘informal guidance’ would allow for RBI’s supervisory managers to act as a bridge to the REs they oversee, offering insights and guidance to regulated entities seeking direction. Of course this would need the RBI to carve out time for the industry’s queries, but not unprecedented. This would also remove any undue speculations, and rumour mongering.
Such a system is not unprecedented—regulators like the U.S. Securities and Exchange Commission (SEC) and the UK’s Financial Conduct Authority (FCA) already provide informal guidance mechanisms, often in the form of early-stage consultations, for certain theme of regulatory clarification.
This approach could help address the operational concerns of the Regulated Entities, while providing the RBI with a feedback loop to better understand the operational challenges and market realities of the sector, almost in realtime or regular basis. Without such an arrangement, the even a minor tear in trust between the regulator and the industry could worsen. Lenders would continue to worry about facing harsh penalties without clarity, while the RBI is rightfully concerned about maintaining the integrity of the financial system.
On a lighter non-patronising note, without any clear indication from the regulator, the situation begins to resemble the silent expectations of a spouse in a faltering marriage, where unspoken signals are often misinterpreted or over read and lead to eventual breakdown. We cannot afford such ambiguity in a sector as vital as finance. Even parents, when dealing with their children, establish clear rules and expectations before eventually transitioning to more flexible guiding principles as the child matures. Regulatory bodies should adopt a similar approach.
Detailed regulations and industry’s access for regulatory clarifications can provide the much-needed clarity for businesses, setting clear boundaries and expectations that reduce uncertainty and foster compliance. They would offer a framework within which companies can operate confidently, knowing that the standards are transparent and consistent for all. While self-governance by the sector is essential, it is the regulator’s role to remove any ambiguity. Without firm guidance, businesses risk being led astray by assumptions, and in finance, those assumptions can cost the trust of consumers, regulators and the investors. That is why we must accept - ‘ishaara kaafi nahin hai.’ A mere signal is not enough.
(Author’s views are not attributable to any of the organisations he is associated with)
