Central bank report in April 2025 shows lending rates of NBFCs move slower than repo rate, raising concerns about credit fairness.

Why does a small shop owner borrowing from a non-banking financial company pays more interest than his neighbour who gets a loan from a bank? The RBI Monetary Policy Report of April 2025 answers this question.

It shows that when the repo rate moved up by 250 basis points between May 2022 and March 2024, banks passed on 125 basis points, while NBFCs passed on only 40 basis points. This gap is now under debate in the market as well as within policy circles.

Recent Development: RBI Monetary Policy Impact On NBFCs

The fresh report makes clear that the RBI monetary policy impact on NBFCs is weaker than on banks. The April 2025 report was released as part of the biannual review of the central bank. It revealed that despite large repo movements, NBFC lending rates remained sticky. This creates an uneven impact for borrowers across sectors.

The comparison of banks and NBFCs is shown below.

Period	Repo Rate Change	Pass-Through by Banks	Pass-Through by NBFCs
May 2022–Mar 2024	+250 bps	+125 bps	+40 bps
Apr 2024–Mar 2025	+50 bps	+20 bps	+5 bps

This table shows the clear difference in pass-through. Even though banks do not fully match the repo changes, they still transmit more than double of what NBFCs do.

Such weak adjustment means NBFC borrowers carry heavier interest costs. It also weakens the purpose of monetary policy.

Read More - Why NBFC Personal Loans Are Beating Bank Offers in 2025

What Is Incomplete Transmission Of Monetary Policy To NBFCs?

Transmission of monetary policy means how RBI’s repo rate change flows into lending rates in the economy. When repo is raised, loans should become costlier. When repo is cut, loans should become cheaper. Banks adjust faster as they are bound by external benchmark lending rates (EBLR) introduced in 2019.

NBFCs do not follow EBLR. They borrow from banks or debt markets. Their cost of funds shifts slowly. This delay creates incomplete transmission of monetary policy to NBFCs.

Channel	Speed of Transmission	Share of Repo Change Passed
Banks	Moderate	Around 50%
NBFCs	Very Slow	Around 15%
Debt Markets	Fast	Nearly 80%

The April 2025 RBI report carried a chart showing NBFC lending rates lagging well behind repo and bank rates. This pattern has continued for many years.

Such incomplete transmission reduces the effectiveness of RBI’s actions. It also leaves a part of the economy outside the influence of monetary policy.

Linking To Past Coverage: RBI Research On NBFC Lending Rates

This is not the first time the RBI has flagged the challenge of rate transmission to NBFCs. In 2020, for instance, when the RBI instituted a series of repo cuts, banks passed on ~90 basis points of reduction over a few months, while many NBFCs adjusted only about 40 basis points, a lag that has long raised questions about market fairness and funding cost asymmetries.

Earlier commentary also discussed whether the RBI might increasingly use Cash Reserve Ratio (CRR) adjustments and liquidity tools to force credit transmission, not relying solely on repo operations. That kind of thinking appeared in reporting around “RBI to Use CRR for Liquidity Transmission” and similar narratives.

A more recent LoansJagat article, “NBFCs in 2025 – Why Most Borrowers Are Making the Switch”, captures how NBFCs are now growing aggressively in retail credit, increasing their market share, and leveraging speed & flexibility to challenge banks. This trend underscores why sharper RBI research matters: it now has to address not just lag in transmission but divergence across sectors, credit types, and business models.

The new RBI report offers more granular numbers on NBFC lending rate response and explores which segments adjust faster or slower. The contrast between earlier times (where transmission was weak) and today (where NBFCs are large players) shows how structural credit dynamics are evolving.

Loan Segment	Average NBFC Rate	Average Bank Rate	Spread Between NBFC and Bank
Housing Loans	11.50%	9.80%	1.70%
Vehicle Loans	13.00%	11.20%	1.80%
SME Loans	14.50%	12.00%	2.50%

Borrowers of housing and vehicle finance often accept these higher rates due to faster processing and fewer conditions at NBFCs. Yet, the burden remains higher compared to banks.

The report says the spread has not reduced despite several repo changes. This makes the case for regulatory intervention stronger.

Learn More - New RBI Circular On NBFCs In 2025 - What It Means For Borrowers

Policy Effectiveness: Monetary Policy Effectiveness In Indian NBFC Sector

A central bank measure is effective only if it reaches every borrower. The April 2025 report shows monetary policy effectiveness in Indian NBFC sector is weak. Past years also tell the same story.

During 2019 and 2020, RBI cut repo by 162 basis points. Bank lending rates fell by 91 basis points. NBFC lending rates dropped by only 41 basis points. This limited response weakens the credit channel.

Timeframe	Repo Change	Bank Lending Rate Change	NBFC Lending Rate Change
Feb 2019–Jun 2020	–162 bps	–91 bps	–41 bps
May 2022–Mar 2024	+250 bps	+125 bps	+40bps

This table shows that across both easing and tightening cycles, NBFCs move far less than banks. The result is a permanent gap.

Such gaps matter because NBFCs cater to small borrowers, semi-urban businesses, and vehicle owners. If monetary policy does not reach them, the economy grows unevenly.

Challenges In RBI Monetary Policy Transmission To NBFCs

The central bank also wrote in the April 2025 report about barriers that block transmission. These challenges in RBI monetary policy transmission to NBFCs are not new, but they remain unsolved.

Challenge	Nature	Past Response
Cost of Funds	NBFCs rely on banks and markets	No direct solution yet
Risk Premium	Investors demand extra spread	Higher supervision only
Lack of Benchmark	No EBLR for NBFCs	Under study since 2024

In past years, the government used liquidity lines, refinance schemes, and special lending windows to ease NBFC costs. But structural reforms were left untouched.

This time, the RBI is openly considering an EBLR-like framework for NBFCs. That would mean their loans would be linked directly to repo or another benchmark. Such a move could finally close the gap.

Conclusion

The April 2025 RBI Monetary Policy Report has revived the debate about fair credit costs. It proves that while banks are adjusting faster, NBFCs remain slow. The outcome is uneven credit rates across the economy.

Borrowers continue to pay more when they depend on NBFCs. This weakens the power of monetary policy. It also raises questions on equality in access to finance.

The next step lies with the RBI. It may soon push NBFCs towards a benchmark rate system. Until that happens, monetary policy will remain incomplete for millions of borrowers in India.

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