NBFCs' rate transmission to end users weaker than banks: RBI
MUMBAI: The Reserve Bank of India is of the view that linking finance companies'
lending rates
with external benchmarks is not feasible even as the regulator is aiming at improving weak transmission of policy rates.
RBI
's annual report released on Thursday shows that transmission of policy rate to end borrowers is the lowest by non-banking finance companies (
NBFCs
) as compared with banks and an attempt to link finance companies' lending rates to policy rates was "not found feasible at this juncture."
The RBI annual report shows that between May 2022 and March 2025, the RBI net raised the repo rate by 225 basis points (bps). In the same period, NBFCs passed on a 38-bps rate hike to borrowers, while commercial banks have hiked rates by 105 bps. This implies that the transmission of policy rate by finances companies is weak.
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One basis point is a hundredth of a percentage point.
The RBI said that it aims to strengthen further the analysis of the transmission of policy impulses to lending rates of non-banking financial companies.
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In the annual report, RBI stated that in 2024-25, it had examined the feasibility of the introduction of the external benchmark-based lending rate (EBLR) system of loan pricing for credit extended by NBFCs to select sectors. This is because the
EBLR regime
has quickened the pace of transmission.
The RBI analysed lending rates and sectoral credit data of NBFCs but it found that it was not feasible introduce EBLR for NBFCs. Under EBLR system, banks have to link lending rates charged to home buyers and small businessmen to an external benchmark which could be either the repo rate (now at 6%) or the treasury bills issued by the RBI.
Nearly 60.6% of the
commercial bank loans
as of December 31, 2024 are linked to the EBLR system, while 35.9% is linked to the marginal cost of lending rate- an internal benchmark rate and 1.6% is linked to the Bank Rate.
The RBI has stated that it aims to strengthen the assessment of monetary policy transmission, monthly data on lending rates of major NBFCs. "The interest rates charged by NBFCs tend to be higher as compared to commercial banks reflecting their liability structure and the risk profile of borrowers, thus the degree of monetary policy transmission differs between NBFCs and banks," RBI said. The RBI report also pointed out that NBFCs remain 'significantly dependent on banks for funding, underscoring the need for greater diversification of their funding sources.' The regulator added that scale-based regulatory framework is likely to further improve governance and risk management.
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