SC Underscores RBI Remit on NBFCs Interest Rates Notwithstanding State Legislations
Moneylife Digital Team 16 May 2022
The Supreme Court (SC) has finally put to rest the uncertainty around the applicability of state legislations on non-banking financial companies (NBFCs) by underscoring the importance of the Reserve Bank of India (RBI) as the regulator and supervisor of NBFCs in India, with oversight on the rate of interest they charge borrowers. The ruling is specifically beneficial to gold loan NBFCs and other regulated NBFCs, including NBFC-microfinance institutions (MFIs), where sensitivity over interest rates is higher, says rating agency CRISIL.
 
To regulate the interest rate charged by moneylenders and protect borrowers, the legislatures of Kerala and Gujarat had sought to bring NBFCs under the ambit of their respective legislations, the Kerala Money Lenders Act, 1958 and the Gujarat Money-Lenders Act, 2011. 
 
The Supreme Court said the state enactments have no application to NBFCs registered under the RBI Act, and regulated by the central bank. It noted that the RBI Act takes a holistic approach with its chapter III-B affording RBI a supervisory role to oversee the functioning of NBFCs from the time of their registration till the time of their commercial death or winding up.
 
The Supreme Court said, while RBI may not be controlling the rate of interest charged by NBFCs on loans advanced by them, it does have the power to step in to determine policy and issue directions.
 
It is observed that while RBI generally leaves it to the market forces to determine the rate of interest—without any direct intervention—states cannot take advantage of this to step in and prescribe limits.
 
Krishnan Sitaraman, senior director and deputy chief ratings officer of CRISIL Ratings, says, “The ruling has two big takeaways for NBFCs. First, it has effectively reaffirmed regulatory sanctity for NBFCs registered with RBI as a separate category of lenders, distinct from the traditional moneylenders. Second, while the SC has not specifically commented on the appropriateness of interest rates being charged by NBFCs, it has implicitly stated that RBI has the jurisdiction and powers to look into the same and is already doing so through the various regulations, master circulars and master directions issued by it." 
 
On their part, NBFCs need to be cautious about the interest rates they charge borrowers, and anything deemed usurious has the potential to be subjected to supervisory scrutiny by RBI, the rating agency says.
 
Comments
saharaaj
1 month ago
we all know NBFC in field of Microfinance are controlled by Loan sharks who are part of political tribe . and State election financiers
VN KULKARNI
1 month ago
ON THESE LINES THE SC CAN HOLD THE RBI CIRCULAR OF JUNE 2021 REGARDING APPOINTMENT OF CEO, WHICH IS STAYED BY VARIOUS HCs.
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