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Querist : Anonymous

Querist : Anonymous (Querist)

11 March 2013 Can a NBFC take a loan @ 3% and give it @ 4% and in a way earn 1% as net income?

Nikhil Kaushik

Nikhil Kaushik (Expert)
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11 March 2013 you may refer to the following discussion:

https://www.caclubindia.com/experts/loan-at-a-nominal-rate-of-interest-1231029.asp#.UT4b_KOTLBE

Querist : Anonymous

Querist : Anonymous (Querist)

12 March 2013 Thanks Nikhil. Nikhil, can you give some valid case where RBI had objections for providing loans at a rate less than 8% for NBFC. Let us look for some opinion which should be concrete. Expert opinions invited.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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12 March 2013 the reference to RBI was about RBI's unhappiness over teaser home loans, which according to RBI was not sustainable in long run and not good for the banking and finance sector. RBI has always tried to avoid artificial low interest rates to avoid any bloodbath competition among lenders.

there is a simple logic, any logical person with declared source of income won't lend at 3% (even saving bank interest rate is more than that). The alternative available is foreign funding, where you may get 3% interest rate. So there you may be able to justify lower rate for on lending.

with respect to tax, there should not be an issue as long as the source of funds is not colored.

Querist : Anonymous

Querist : Anonymous (Querist)

12 March 2013 Thanks Nikhil. You had been elaborative & clear. Still may I look for some other experts to opine on the matter.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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12 March 2013 Definitely. as mine is just a point of view. I hope some other expert may provide a much more positive opinion.

Querist : Anonymous

Querist : Anonymous (Querist)

12 March 2013 Thanks Nikhil. You were really helpful. Let us wait for some more opinions.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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01 August 2024 In India, the regulation of Non-Banking Financial Companies (NBFCs) is governed by the Reserve Bank of India (RBI). The RBI has specific guidelines regarding the lending rates and operations of NBFCs. Here’s a breakdown of your queries:

### **1. Can a NBFC Take a Loan @ 3% and Lend @ 4%?**

Yes, an NBFC can take a loan at one interest rate and lend it at a higher rate, earning the difference as income. This practice is quite common in financial institutions. However, there are important considerations:

- **Regulatory Compliance:** The NBFC must comply with RBI regulations, including those related to the interest rates on loans. While there is no explicit cap on the maximum or minimum interest rates that NBFCs can charge borrowers, they must adhere to fair practices and transparency norms.

- **Disclosure:** The NBFC must ensure that all terms and conditions, including interest rates, are disclosed clearly to borrowers. This is important to maintain transparency and avoid any regulatory scrutiny.

### **2. RBI Guidelines on Interest Rates**

- **Interest Rate Regulation:** The RBI does not prescribe specific interest rate floors or ceilings for loans provided by NBFCs. Instead, the RBI mandates that the interest rates should be reasonable and not exploitative. The financial institution must ensure that it adheres to fair lending practices.

- **Case Study:**
- **RBI Circular:** One notable instance of RBI's concern regarding lending rates was in the context of microfinance institutions (MFIs) and their interest rates. RBI has issued guidelines to ensure that MFIs charge reasonable interest rates and that their practices do not exploit borrowers. For example, RBI’s **'Revised Guidelines on Microfinance Institutions'** include a cap on the interest rates that can be charged, aimed at ensuring affordability for borrowers.
- **Supervision and Inspection Reports:** In certain cases, RBI has raised objections when NBFCs or MFIs were found to be charging excessively high interest rates or engaging in practices that led to financial strain on borrowers.

### **Expert Opinions:**

- **Financial Experts:** Financial experts emphasize that NBFCs should operate transparently and ensure their interest rates are competitive yet fair. Excessive rates can lead to regulatory scrutiny and affect the reputation of the institution.

- **Legal and Compliance Advisors:** These professionals often advise NBFCs to stay updated with RBI guidelines and ensure compliance to avoid any legal or regulatory issues. They also recommend periodic reviews of lending practices to ensure adherence to regulatory standards.

### **Conclusion:**

An NBFC can earn income by borrowing at a lower rate and lending at a higher rate, as long as it complies with RBI regulations and maintains transparency in its operations. There is no blanket restriction on the minimum interest rate for loans provided by NBFCs, but the institution must adhere to principles of fairness and regulatory norms.

For specific cases or detailed opinions, reviewing RBI circulars, guidance notes, and consulting with legal experts or financial consultants is advisable.

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