RBI has vide circular DNBS. CC.PD. No.266/03.10.01/2011-12 dated 26 March 2012 (Guidelines on Fair Practices Code for NBFCs) directed NBFCs to have a documented Interest Rate Model Policy approved by the Board of Directors which would lay down internal principles and procedures in determining interest rates and other charges on the loan products offered by NBFCs.
The specific points referred to in the above referred RBI circular are,
- Charging of excessive interest rates by NBFCs.
- The need for adoption of an interest rate model along with approach for gradations of risk & rationale for charging differential rates.
- Disclosure of rates of interest rates, changes thereof and publicity thereto.
- Adoption of annualized rates of interest while dealing with customers.
Board through this policy has laid down appropriate internal principles and procedures in determining the range of interest rates that shall be applicable to various customers. The Company will apply best industry practices so long as such practice does not conflict with or violate RBI guidelines.
3. Interest Rate Model:
Interest Rate Model defines the basis on which the interest rate range shall be arrived at for various loan products. The model takes into consideration the constituents which are defined based on the various operational expense line items and the premium expectations from the business. The following items shall form a part of the Interest rate model –
- Weighted Average Cost of borrowing (WAC) – The Company will borrow funds from various Banks / Financial Institution / Money market for onward lending to its customers. In addition to the borrowed funds the company uses equity from its shareholders.
- Operational Expenses – In addition to WAC, the company in order to generate and maintain the business incurs certain expenses towards manpower, infrastructure, technology, legal, collection, professional expertise and other business-related expenses. These are termed as operational expenses.
- NPA & Provisioning – The company incurs certain cost on account of losses arising on account of NPA customers. This inter alia includes the provisioning required to be made for standard assets. This is termed as credit cost.
These costs are collectively referred to as a ‘Transfer Pricing / Base Rate’.
- Risk Premium – The Company shall categorize its customers based on risk associated to the specific nature of each customer based on certain parameters covered under approach for gradation of risk. Based on the risk score so arrived the company shall define a range of risk premium. The customer shall be applied a certain risk premium falling within the risk premium range soarrived.
Thus, the final pricing to the customer shall be as follows
|FY 2019-2020 (January 1, 2020, to March 31, 2021)||11.00% (Eleven percent)|
Applicable Interest Rate is aggregate of Base Rate and the Spread, the Applicable Interest Rate shall change if there is change in either Base Rate, and, or the Spread.
The Base Rate effective from January 1, 2020, are as follows:
|Sr. No.||Financial Year (FY)||Base Rate (%)|
|1.||FY 2019-2020 (January 1, 2020, to March 31, 2021)||11.00% (Eleven percent)|
|2.||FY 2020-2021||11.00% (Eleven percent)|
|3.||FY 2021-2022 (Till further notice)||11.00% (Eleven percent)|
The Base rate is applicable only for the Floating rate loans disbursed to the customers.
Fixed rate loans are not linked to benchmark but are decided based on their COF (allocated through Fund transfer pricing), Operational expenditure, Business related risks and desired ROE/ROA. Factors affecting calculation of spreads to arrive at final rate.
4. Approach for Gradation of Risk & Risk Premium Parameters
Risk grading enables the Company to differentiate customers across different risk spectrum and helps in applying risk premium to that customer. The risk premium attached with a customer shall be assessed inter-alia based on the following factors:
a) profile and market reputation of the borrower,
b) inherent nature of the product, type / nature of facility, refinance avenues, whether loan is eligible for bank financing, loan to value of asset financed,
c) tenure of relationship with the borrower group, past repayment track record and historical performance of our similar clients,
d) group strength, overall customer yield, future potential, repayment capacity based on cash flows and other financial commitments of the borrower, mode of payment
e) nature and value of primary and secondary collateral / security,
f) type of asset being financed, end use of the loan represented by the underlying asset,
g) interest, default risk in related business segment,
h) CIBIL score of an individual which determines the credit payment history across loan types and credit institutions over a period of time.
i) regulatory stipulations, if applicable,
j) and any other factors that may be relevant in a particular case
5. Communication to Customers:
- The company shall intimate the borrower the annualized Rate of Interest at the time of sanction of the loan along with the tenure and amount of monthly installment.
- The customer shall also be informed about the Interest rate model policy that the customer can visit the company website for referring the policy and any change in the benchmark rates and charges for existing customers would be uploaded on the web site of the Company.
- Any changes in the rates and charges for existing customers would also be communicated to them through either of mail, letter, SMS.
- The company shall follow the guidelines mentioned in the Fair Practice Code guidelines as issued by RBI from time to time and as adopted by the company through its Fair Practice Code Policy.
6. Monitoring and Review:
The Company has formed a committee of executives called ‘Interest Rate review committee’ to review the interest rates based on the parameters as above. The committee shall review at the beginning of every quarter to decide the interest rates for that quarter.
· Composition of Interest Rate Review Committee:
The Enterprise Risk Group (ERG) will regulate and review all interest rate policy decisions on a regular basis.
- Duties of the committee
a) Formation of Interest Rate Policy
b) Amendment of Interest Rate Policy
c) Quarterly review of Interest Rates & Policy
Any changes to the Transfer pricing and Risk premium range shall be approved by Committee. Any changes to the Interest Rate policy shall have to be approved by the Board.