Are payday loans legal

Dear Sir,

RBI does not specifically cap NBFC interest rates. So there is no direct RBI rule that says 0.7–1% per day is automatically illegal if the lender is a legitimately registered NBFC and follows RBI rules.

In India, state money-lending laws (e.g., in Karnataka) can independently cap interest rates or regulate interest. Some states impose annual interest caps (often around 18–24% p.a.) on unregistered money-lenders.

Many loan apps or fintech lenders claim to be RBI-registered but may actually be unregulated entities or use a third-party NBFC shell to evade rules.

Dear Client,
While the RBI does not set a specific recommended interest rate for NBFC, it has issued guidelines to the NBFCs through the Fair Practices Code to ensure transparency and prevent the charging of excessive interest. As per Master Circular dated 01/07/2010 issued by the regulatory authority RBI on Fair Practices Code, Clause (vii)(B)(a), the Board of each NBFC shall adopt an interest rate model taking into account relevant factors such as, cost of funds, margin and risk premium, etc and determine the rate of interest to be charged for loans and advances. The rate of interest and the approach for gradations of risk and rationale for charging different rate of interest to different categories of borrowers shall be disclosed to the borrower or customer in the application form and communicated explicitly in the sanction letter. (b) The rates of interest and the approach for gradation of risks shall also be made available on the web-site of the companies or published in the relevant newspapers. The information published in the website or otherwise published should be updated whenever there is a change in the rates of interest. (c) The rate of interest should be annualised rates so that the borrower is aware of the exact rates that would be charged to the account. Grievance Redressal Procedure has also been laid down to adequately address customer complaints. All communications to the borrower related to change in the terms and conditions including disbursement schedule, interest rates, service charges, prepayment charges etc., have to be in vernacular language or a language as understood by the borrowers. NBFCs are required to mention the penal interest charged for late repayment in the loan agreement and to to ensure that changes in interest rates and charges are effected only prospectively. Usually, NBFCs compute interest on the daily outstanding principal balance of the loan. This method, sometimes referred to as a "daily rest," means that as the principal amount is reduced (e.g., when an EMI is paid or a prepayment is made), the interest for the subsequent days is calculated on the lower, revised balance. This is generally more favourable to the borrower compared to methods that use monthly or longer rests. However, the RBI mandates that all NBFCs must communicate the annualized rate of interest (APR) to their borrowers explicitly in the sanction letter and loan application form. So, in the given scenario, review your loan sanction letter that reflects the annualized rate of interest (APR) and if any irregularity in computation of ROI noticed, then you should first escalate your grievance to the Grievance Redressal Officer of the concerned NBFC failing which to the RBI on its grievance redressal portal under the integrated Banking Ombudsman Scheme at https://cms.rbi.org.in or on the Digital Complaint Management System (CMS) Portal: https://cms.rbi.org.in/cms/IndexPage.aspx for a quick resolution in the matter.