The Reserve Bank of India (RBI) has taken a significant step in ensuring the stability and compliance of the financial sector by directing four non-banking financial companies (NBFCs) to cease and desist from sanctioning and disbursing loans. The affected companies include DMI Finance Private Limited, Asirvad Micro Finance Limited, Arohan Financial Services Limited, and Navi Finserv Limited. This directive is effective from the close of business on October 21, 2024, as per the RBI's latest announcement.
The RBI's decision is based on material supervisory concerns observed in the pricing policies of these companies. Specifically, the central bank has identified issues with the 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. This action is part of the RBI's ongoing efforts to ensure fair, reasonable, and transparent pricing practices, especially for small value loans.
Over the last few months, the RBI has been sensitizing these entities through various channels on the need to use their regulatory freedom responsibly. However, despite these efforts, unfair and usurious practices continued to be seen during onsite examinations as well as from data collected and analyzed offsite. The RBI has emphasized that these practices are not only detrimental to consumers but also undermine the overall stability of the financial system.
The RBI has also highlighted deviations in respect of Income Recognition & Asset Classification (IR&AC) norms, resulting in evergreening of loans. Evergreening refers to the practice of extending the repayment period or reducing the interest rate on existing loans to avoid default, which can lead to a buildup of non-performing assets (NPAs). Additionally, the central bank noted deviations in the conduct of gold loan portfolios, mandated disclosure requirements on interest rates and fees, and outsourcing of core financial services.
DMI Finance, one of the affected NBFCs, has been in the news recently for its significant equity capital raise. In August 2024, DMI Finance raised about $333 million in equity capital from MUFG Bank, a Japanese banking behemoth. This investment was part of a larger $400 million investment round led by MUFG Bank in April last year. Despite this substantial investment, the RBI's directive underscores the need for DMI Finance to adhere strictly to regulatory guidelines.
Arohan Financial Services, another affected NBFC, is part of the Aavishkaar Group and counts private equity firms Tano Capital and TR Capital as shareholders. Its other investors include impact investor Maj Invest, Danish development financier IFU, and Dutch development bank FMO. The RBI's action against Arohan underscores the importance of ensuring that all NBFCs operate within the bounds of regulatory compliance.
Navi Finserv Limited, led by Sachin Bansal, co-founder of Flipkart, is also among the NBFCs barred from loan sanctioning and disbursal. Navi Finserv has been in the news for its innovative financial products and services. However, the RBI's directive highlights that even well-known entities must adhere to regulatory norms to maintain the trust and stability of the financial system.
Asirvad Micro Finance, a subsidiary of gold loan financier Manappuram Finance, is the fourth NBFC affected by the RBI's directive. The RBI's action against Asirvad underscores the need for all microfinance institutions to ensure fair and transparent pricing practices, particularly in assessing household income and considering existing or proposed monthly repayment obligations.
The RBI has stated that these business restrictions do not preclude these companies from servicing their existing customers and carrying out collection and recovery processes in accordance with extant regulatory guidelines. However, the central bank will reconsider the restrictions once these NBFCs demonstrate compliance with guidelines on pricing policy, risk management processes, customer service, and grievance redressal.
This move by the RBI is part of its ongoing efforts to ensure that all financial entities operate within a framework of transparency and fairness. The central bank has been proactive in sensitizing regulated entities on the need to use their regulatory freedom responsibly. However, despite these efforts, the RBI continues to notice unfair and usurious practices during onsite and offsite examinations.
The RBI's directive allows these firms to complete ongoing transactions before the ban takes effect. This grace period is intended to facilitate the closure of transactions in the pipeline, if any. The central bank has emphasized that it will review the restrictions once these NBFCs demonstrate suitable remedial action to adhere to regulatory guidelines at all times.
In conclusion, the RBI's decision to bar DMI Finance and other NBFCs from loan sanctioning and disbursal highlights the importance of regulatory compliance in maintaining the stability of the financial sector. The central bank's actions are aimed at ensuring that all financial entities operate with fairness, transparency, and responsibility.
