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If critics are to be believed, the Reserve Bank of India (RBI) is once again playing favourites, with fledgling fintechs and innovation potentially at risk.

Several founders and experts told YourStory that the recent RBI crackdown on four NBFCs smacks of arbitrariness, with the rationale behind it lacking logic.

The four NBFCs—DMI Finance, Navi Finserv, Asirvad Micro Finance, and Arohan Financial Services—have been penalised for allegedly charging high interest rates, but they are not alone in doing so.

“If NBFCs are being penalised for 30%-40% rates, why aren’t credit card companies, sometimes charging up to 40% or more, held to the same standard?” a founder of a lending startup said, requesting anonymity.

In its order last week, the RBI noted that some NBFCs were charging excessively high interest rates, especially on small loans. Asking the companies to halt lending, the central bank highlighted that the difference between what they charge borrowers and their borrowing costs (their profit margin) was excessively large. It also found that the companies were violating provisions of the Fair Practices Code.

The RBI does not directly regulate the interest rate spread that NBFCs can charge. However, NBFCs are expected to establish internal principles and procedures for determining interest rates, ensuring that any spread between the rates they charge and their borrowing costs is reasonable and justified by risk.

Several voices from the lending startup ecosystem have raised concerns about the RBI’s actions, questioning what “reasonable rates” mean to the central bank.

“The regulator has already made it clear that all interest rates and fees charged to customers must be disclosed [at the time of disbursing the loan]. Only when the customer reads it and gives consent do they proceed,” another founder tells YourStory, also requesting anonymity.

This February, the RBI mandated that all lending institutions, including banks, NBFCs, and digital lenders, disclose all charges related to loans to enhance transparency.

“So, I don’t think anybody today can operate without disclosing interest rates and charges. But the real question is: why are NBFCs being singled out when credit card rates are higher? If there’s a concern about a 30% interest rate being too high, then shouldn’t the RBI be cracking down on 40% credit card interest rates too?” the fintech founder argues.

According to information available on credit marketplace Paisabazaar, DMI Finance and Navi charge interest rates as high as 45% per annum. DMI Finance and Navi Finserv offer loans of up to Rs 4 lakh and Rs 20 lakh, respectively.

DMI Finance’s lending spreads increased to 14.6% in FY24 from 14.1% a year ago, according to a report by ICRA. For Navi, the report noted, “Any shortfall in collections in the past has been absorbed by the subordination and/or excess interest spread available in the structure.”

Other executives have echoed concerns about the regulatory environment in India’s financial sector.

Anand Lunia, Founding Partner of IndiaQuotient and an investor in lending startups LendingKart and LoanTap, criticised the current approach in a post on X.

The founder of a digital lending startup, also requesting anonymity, highlighted the challenges NBFCs face when pricing their products. Non-banks must account for future securitisation prospects—crucial for maintaining liquidity—and fraud, which might render a loan unserviceable. “It costs a lot to set up a modern NBFC with modernised underwriting systems, branch networks, etc.,” he notes.

He warned that financial inclusion, a goal the government itself champions, could be undermined if lending rates are suppressed without considering the associated risks.

“I’m not sure if some of these products will work at all if NBFCs are not allowed to charge appropriate rates,” he reflects. “Sure, the costs need to come down, but there has to be a natural progression for that. Underwriting unsecured loans is a very difficult task.”

Credit cards vs NBFCs

Banks impose various fees on credit cards, with interest on unpaid balances being the most significant. This interest is expressed as an Annual Percentage Rate (APR), representing the yearly cost of borrowing on the credit card.

Credit card APRs in India may include promotional rates, sometimes as low as 0%, before transitioning to regular rates. For instance, Axis Bank’s APR can go up to 52.86%, while Yes Bank’s APR goes up to 28.8%. These can be equal to, or even higher than, those offered by regulated microfinance institutions (MFIs), which typically charge between 20-30% annually.

Some argue that it’s not just the high interest rates but how transparently they are charged.

Credit card companies provide clear information about APRs and any associated charges, notes Anirudh A Damani, Managing Partner at Artha Venture Fund—which has invested in digital lending startups such as KarmaLife and LenDenClub.

“Having tested the waters myself, I found instances where an NBFC claimed an interest rate of 24%, but once processing fees and hidden costs were added, the effective interest rate climbed to over 36%. This lack of clarity is problematic, especially in loans catering to SMEs or individuals who may not have the financial literacy to identify such discrepancies,” he explains.

While some in the industry argue that high interest rates are necessary to cover the risk of unsecured lending, there is an urgent need for better transparency and borrower protection.

Ritesh Srivastava, Founder of FREED, a debt resolution platform that helps overburdened borrowers manage repayments and avoid harassment, challenges the idea that borrowers facing high-interest loans have no alternatives.

“You’re not giving the loan to a guy because he’s needy. You’re giving a loan to a guy because he’s loan-worthy,” Srivastava asserts, dismissing the notion that NBFCs are the only option for those desperate for credit.

However, Srivastava also points out that borrowing at higher rates does not mean borrowers are being misled or “screwed” by lenders.

“Even when NBFCs fully disclose their fees, interest rates, and EMIs, borrowers tend to focus only on whether they can afford the EMI, without considering the overall cost of the loan. As a result, they may end up paying double the amount borrowed over time.”

In the meantime, the market regulator appears poised to intensify its scrutiny. According to a Morgan Stanley report, more lending firms may come under the regulatory scanner.

“The regulator’s role is not just to support innovation but also to ensure that it is done responsibly,” Damani remarks.