• Max interest rate chargeable by NRI when lending money to Indian citizen in rupees

Greetings, 
The following article (look at end of the message) from RBI states that when an NRI lends money to a resident Indian in INR, the rate of interest on the loan shall not be more than two per cent above Bank Rate prevailing on the date of availment of loan.

Different banks issue different types of loans to their customers at different interest rates. For ex: On Personal loans (similar to lending without security), the interest rates in India ranged from 11-33% (Kotak, HDFC, Fulletron etc).

That being said, as an NRI, am I allowed to lend money at an interest rate upto 35%?
Is there a better way to determine whats the exact value of the "Bank Rate prevailing" on any given day?
Kindly help me out.

Article Name:
Master Direction – Borrowing and Lending transactions in Indian Rupee between Persons
Resident in India and Non-Resident Indians/ Persons of Indian Origin

Article URL:
https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=10191
Asked 1 year ago in Business Law from United States

No the bank rate is different then what bank charges from.customers the bank rate ismat what bank takes loan from the central bank.

Bank Rate: Bank Rate is the rate of interest charged by The Central Bank of India against loans offered to commercial banks. Bank rate is usually higher than repo rate. Unlike repo rate, bank rate directly affects the end user, in this case the customer, as high bank rates mean high lending rates. When bank pay high interest rate to obtain loan from RBI, they in return charge the customer high interest rate to break even. Also known as “Discount Rate”, bank rate is a powerful tool used by the RBI to control liquidity and money supply in the market. The current Bank Rate is the same as MSF rate, i.e. 6.25% p.a

https://m.rbi.org.in/scripts/WSSView.aspx?Id=22147

Shubham Jhajharia
Advocate, Ahmedabad
19309 Answers
75 Consultations

5.0 on 5.0

Hi,

Foreign exchange laws of India (or any country) recognize the principle that the amount of money going out of India should not be more than the value it creates in India. Further, foreign exchange laws in India have made specific provisions regarding NRIs who have been distinguished from other non - residents. This status applies to both equity and debt transactions made by NRIs. With the above background, my response to your query is in the following paragraphs.

Bank Rate

Bank rate is not the interest rate charged by the banks to the customers. There are separate regulations regarding the interest charged by the banks to the customers. It is covered under the Reserve Bank of India Act, 1934 ("the Act").

Bank rate is the rate charged by the Reserve Bank of India ("RBI") to buy or (re- discount) commercial papers, bills of exchange, rated securities etc from the banks or other entities under the Act. This rate is constant for all the banks and financial institutions, as it is defined as a standard rate under the Act.

Reviewing Bank Rate

The current bank rate as on April 30, 2018 is 6.25%.

You may view the same at rbi.org.in under the dropdown list "Policy Rate" on the left hand side under the head CURRENT RATES.

Therefore, assuming you lend the money today, then as per paragraph 2.1.1 of the Master Directions (defined below), you cannot charge an amount more than 8.25%. Consequently, you cannot charge 35% for the loan provided.

Master Directions means Master Direction – Borrowing and Lending transactions in Indian Rupee between Persons

Resident in India and Non-Resident Indians/ Persons of Indian Origin.

Hope the above helps.

Regards,

Prashant

Prashant Kumar
Advocate, Bangalore
15 Answers

4.0 on 5.0

Dear Sir

You are very well acquainted with the RBI Guidelines and Circular. However, i am afraid you are under wrongful assumption regarding the prevailing rate of interest on Personal Loan in India. Maximum rate of interest on personal loan is around 14%. Moreover, the RBI guidelines are very clear that when it say "Rate of interest on the loan shall not be more than two per cent above Bank Rate prevailing on the date of availment of loan;"

So you have to consider the "Bank Rate" which is fixed by RBI. Current Bank Rate is 6.25%. So you cannot charge more then 8.25% at any time.

If you have any question then please feel free to ask. i am currently in New York. and will be back india after two week. I do foreign investment law, corporate law and commercial litigations. If you need any assistance in india, then feel free to contact to me.

VIvek N Mapara

Vivek Mapara
Advocate, Ahmedabad
28 Answers
3 Consultations

5.0 on 5.0

The prevailing bank rate of interest generally refers to prime lending rate by State bank of India.

You cannot interpret the term to your convenience

T Kalaiselvan
Advocate, Vellore
56681 Answers
701 Consultations

5.0 on 5.0

Hi

1) Bank rate is defined as the rate of interest charged by The Central Bank of India against loans offered to commercial banks.

2) The current Bank Rate is the same as Marginal Standing Facility Rate (MSF): i.e. 6.25% p.a where as the prime lending rate is 8.10%.

3) So as per rules of RBI, you should take in to account the prime lending rate as guidance rate.

a) you can charge an interest of up to 10.25% per annum plus Taxes, plus costs of currency hedging risks if you are lending to persons

and/or

b) you can charge an interest of up to 11.1% per annum plus taxes plus costs of currency hedging risks if you are lending to Companies in India.

4) Please note taxes means Tax Deduction at Source on Interest income accrued to you

5) As per clause 2.1.1 of FED Master Direction No. 6/2015-16, dated January 1, 2016 Borrowing in INR by persons other than companies in India are subject to satisfying the following conditions:

a) Borrowing shall be only on a non-repatriation basis;

b) The amount of loan should be received either by inward remittance from outside India or by debit to NRE/NRO/FCNR(B)/NRNR/NRSR account of the lender, maintained with an authorised dealer or an authorised bank in India;

c) Period of loan shall not exceed 3 years;

d) Rate of interest on the loan shall not be more than two per cent above Bank Rate prevailing on the date of availment of loan;

e) Payment of interest and repayment of principal shall be made only to the NRO account of the lender.

6) Costs of currency hedging risks are 6-11% per annum depending on your foreign exchange dealer for a 3 year contract. currency hedging is a risk insurance cover obtained by an entity or person dealing with foreign currencies so as to protect himself from exchange rate fluctuations.

Hope this information is useful.

Rajgopalan Sripathi
Advocate, Hyderabad
1658 Answers
298 Consultations

5.0 on 5.0

Without money lending license one can not lend money to another in India.

So the norms of the RBI applies to only those who has got such license.

To have clarity on the rate of interest it is better to send letter under RTI seeking necessary information.

Devajyoti Barman
Advocate, Kolkata
17808 Answers
252 Consultations

5.0 on 5.0

A PIO can advance loan to a ‘person resident in India’ (not being a company) from his/her NRO account after satisfying the following conditions:

a) The loan should be on non-repatriation basis (no remittance possible outside India);

b) The loan amount should be received by the borrower either by inward remittance from outside India or by debit to NRO/NRE/FCNR(B) account of the lender;

c) period of loan should not exceed 3 years

d) Rate of interest on the loan cannot be more than 2% above bank rate prevailing on the date loan was availed;

e) Repayment by the borrower should be made only to the NRO account.

f) you cannot advance loan at 35 per cent interest rate

Ajay Sethi
Advocate, Mumbai
66917 Answers
4041 Consultations

5.0 on 5.0

Hello,

Since 2.1.2 of the same resolution talks about the interest rate in SBI therefore you have to charge as per the interest rate prevailing in the SBI at the time of lending the amount.

Though the relevant clause pertaining to you does not talk about any bank but as per the law inference has to be taken from other part of the documents.

regards

Anilesh Tewari
Advocate, New Delhi
16918 Answers
259 Consultations

5.0 on 5.0

Bank rate is the rate charged by the central bank/RBI for lending funds to commercial banks. Seems you had a misconception regarding the meaning of bank rate.

Go to the website of RBI and see the tab 'current rates' to find out the prevailing bank rate.

Vibhanshu Srivastava
Advocate, New Delhi
8564 Answers
134 Consultations

5.0 on 5.0

First of all you are not allowed to lend and charge interest. If you are making any advance you can receive the amount advanced only and any interest there on can not be legally charged.

Vimlesh Prasad Mishra
Advocate, Lucknow
5507 Answers
18 Consultations

4.9 on 5.0

Dear Client,

Rate of interest will apply according to rates of Nationalized bank like SBI not of private financial institution/bank.

For example: If SBI charges 10% interest to anyone who takes a loan, then the interest payable on loan issued by the NRI’s cannot be more than 12%.

Yogendra Singh Rajawat
Advocate, Jaipur
13207 Answers
17 Consultations

4.6 on 5.0

1. Bank Rate means the Rate of Interest PAYABLE to the public by Banks on Deposits made by Public. The average Bank Interest Rate is say 7% P.A.

2. The Bank /FI /FII /DI /NBFC Lending Rate (Loans, Mortgage) can be 7% plus 2% = totalling to 9%

3. Any other calculations are infructuous and illegal

Keep Smiling .... Hemant Agarwal

Hemant Agarwal
Advocate, Mumbai
2423 Answers
14 Consultations

5.0 on 5.0

1. First of all you can not conduct the commercial act of lending money by charging interest without taking appropriate license from RBI.

2. All Banks fix their interest rate by charging their administrative cost on the rate at which they get the fund from the RBI.

3. Those private non banking financial organisations show different charge like charge apportioned for the risk taken for giving unsecured loan etc.

4. In the instant case, an individual NRI can not charge more than 2% interest than what RBI charges for providing loan/funds to the banks.

Krishna Kishore Ganguly
Advocate, Kolkata
22518 Answers
594 Consultations

5.0 on 5.0

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