The Reserve Bank of India (RBI) has issued a ban on four non-banking financial institutions (NBFCs) from sanctioning and disbursing loans beginning October 21, 2024. Asirvad Micro Finance, Arohan Financial Services, DMI Finance Private, and Navi Finserv, founded by Flipkart founder Sachin Bansal, are among the non-bank financial institutions.
The bank explained in a statement that its "action is based on material supervisory concerns observed in the Pricing Policy of these companies in terms of their Weighted Average Lending Rate (WALR) and the Interest Spread charged over their cost of funds, which are found to be excessive and not in adherence with the regulations" . In its statement, the bank stressed that these business limits do not preclude the entities from servicing existing clients or carrying out collection and recovery activities in accordance with current regulatory rules.
"Navi Finserv Limited is dedicated to operating its company with the best levels of compliance, customer service, and transparency. "The company is reviewing the directions received from the Hon'ble Reserve Bank of India and will work with them to address all of the concerns raised in a timely and comprehensive manner," stated Navi Finserv in an official statement.
In accordance with Section 45L(1)(b) of the Reserve Bank of India Act, 1934, the Reserve Bank of India has today directed the following NBFCs to stop approving and disbursing loans, with effect from the close of business on October 21, 2024.
The Reserve Bank's comprehensive supervision instructions have been used to communicate these directives to the relevant NBFCs today. The basis for this action is significant supervisory concerns regarding these companies' pricing policies, specifically their Weighted Average Lending Rate (WALR) and the Interest Spread charged over their cost of funds, which are deemed excessive and noncompliant with the regulations as laid down in the Master Direction - Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directives, 2022 issued March 14, 2022 (updated as of July 25, 2022) & Master Direction - Reserve Bank of India (Non-Banking Financial Company-Scale Based Regulation) Directions, 2023, issued October 19, 2023 (last revised on March 21, 2024).
These are also deemed to be inconsistent with the provisions outlined in the Reserve Bank's Fair Practices Code.
Over the last several months, the Reserve Bank has been informing its Regulated Entities, via various means, on the need of using their regulatory independence properly and ensuring fair, reasonable, and transparent pricing, particularly for small loans. However, unfair and usurious activities were seen both during onsite tests and in data gathered and evaluated offshore
In addition to usurious pricing, these NBFCs were found to be in violation of regulatory requirements for assessing family income and taking into account current / planned monthly payback responsibilities for their microfinance loans. Deviations were also noticed in terms of Income Recognition & Asset Classification (IR&AC) regulations, which resulted in loan evergreening, gold loan portfolio management, required disclosure requirements on interest rates and fees, outsourcing of essential financial services, and so on.
These business limitations will take effect at the close of business on October 21, 2024, to assist the conclusion of any transactions that are in the pipeline. These business constraints do not prevent these organizations from serving their existing clients and carrying out collection and recovery activities in compliance with current regulatory rules.
These business restrictions will be reviewed once the Reserve Bank receives confirmation from the companies that appropriate remedial action has been taken to ensure that the regulatory guidelines are followed at all times, particularly in terms of pricing policy, risk management processes, customer service, and grievance redressal.
