The Reserve Bank of India (RBI) has reaffirmed that small firms and borrowers are subjected to exorbitant interest rates by microlenders and non-bank financiers.

Small finance banks (SFB) have been urged by Deputy Governor Swaminathan J. to implement "responsible lending practices" and refrain from imposing usurious fees and exorbitant interest rates. The deputy governor was expressing the opinions that Governor Shaktikanta Das had stated in the monetary policy for June.

During a recent Conference of Directors of Small Finance Banks in Bengaluru, Swaminathan stated, "It is essential for the SFBs to adopt responsible lending practices, as the target group of such lending is mostly the marginalized and underserved sections of society." He went on to say that small finance banks will be crucial to India's development by the year 2047.

"It is depressing to learn about heinous acts committed by certain SFBs, such as usurious fees, charging exorbitant interest rates, collecting advance payments without offsetting them against outstanding loans, and so on. It is also found that grievance redressal system is far from adequate in most SFBs,” the deputy governor added.

Earlier, RBI Governor Shaktikanta Das expressed similar views. The Governor had noted in his monetary policy statement on June 7 that "it has also been observed in certain microfinance institutions and NBFCs that the interest rates on small-value loans are high and appear to be usurious."

The aims for small finance banks, in Swaminathan's words, are "very significant" because they will play a pivotal role in advancing inclusive growth, entrepreneurship, and financial services to the underprivileged—all of which are critical to India's ascent to a high-income economy. He thus urged them to "actively participate" in lending under the many government programs in order to increase the availability of credit at reasonable rates, especially for the weaker members of society.

The deputy governor emphasized that strengthening bank boards and placing succession planning at the top of their lists of priorities are two further ways that small financing banks may raise their governance standards. 

"We see that certain SFBs still do not have at least two full-time directors, despite the fact that the SFBs are expanding their boards by adding new members. I would advise these institutions to promptly explore adding more WTDs (whole-time directors),” he said.