RBI in talks with NBFCs to enable rate transmission

MUMBAI: In a bid to enhance the efficacy of monetary policy transmission across the financial system, the Reserve Bank of India has launched a consultation process with non-bank financial companies (NBFCs). The dialogue, which began in May, seeks to identify the structural and operational bottlenecks that have hindered the effective transmission of recent policy rate cuts to borrowers, according to two people familiar with the development.

NBFCs play a crucial role in financial inclusion, as they extend credit to people, communities and small businesses that are often underserved by traditional banks. The RBI’s engagement signals a growing concern within the central bank over the lag in rate transmission by these institutions, even as banks have shown relatively better, albeit still partial, alignment with monetary policy moves.

The RBI annual report shows that between May 2022 and March 2025, the RBI net raised the repo rate by 225 basis points (bps). In the same period, NBFCs passed on a 38 bps rate hike to borrowers, while commercial banks have hiked rates by 105 bps. This implies the transmission of policy rate by finance companies is weak.

RBI has cut the policy repo rate by 100 bps since the start of the easing cycle in February.

“The regulator has reached out to a few NBFCs where it believes transmission has been weak,” said the chief executive of a NBFC. Key concerns flagged in the consultation include higher cost of funds for NBFCs, asset-liability mismatches, credit risk premiums and liquidity constraints-factors that blunt the impact of monetary policy on lending rates within the sector.