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RBI sets average base lending rate for NBFC-MFIs at 7.81% for April-June quarter

Base rate is a minimum rate at which lending institutions can give loans. But they typically charge other components above the base rate to arrive at the final lending rate.

March 31, 2021 / 11:17 AM IST

The Reserve Bank of India (RBI) on March 31 fixed the average base rate that NBFC-MFIs can charge their borrowers at 7.81 percent for the quarter beginning April 1, 2021.

"The Reserve Bank of India has today communicated that the applicable average base rate to be charged by Non-Banking Financial Company – Micro Finance Institutions (NBFC-MFIs) to their borrowers for the quarter beginning April 1, 2021 will be 7.81 per cent," the RBI said.

RBI, on the last working day of every quarter, advises the average of the base rates of the five largest commercial banks for the purpose of arriving at the interest rates to be charged by NBFC-MFIs to their borrowers in the ensuing quarter.

But, smaller MFIs have been asking the RBI to make the calculation broad-base by taking into consideration a wider set of banks and NBFCs. This is because smaller MFIs get loans at a higher rate.

"The base rate calculation needs to go beyond five big banks to a wider set of lenders. This will make the average base rate more realistic," said P Satish, executive director at Sa-Dhan, a lobby of microlenders.

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MFIs are institutions that source funds from banks and then lend to smaller borrowers.  While bigger MFIs get cheaper loans from banks, smaller ones with a lower rating typically pay more.

In a circular issued in February 2014, the RBI had said the interest rates charged by an NBFC-MFI will be lower of the cost of funds plus margin or the average base rate of the five largest commercial banks by assets multiplied by 2.75.

The RBI introduced the base rate system to bring in more transparency in the interest-rate setting process. A base rate is the minimum rate at which lending institutions can give loans. They typically charge other components above the base rate to arrive at the final lending rate.

Dinesh Unnikrishnan
first published: Mar 31, 2021 11:17 am

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