Reserve Bank of India (RBI) has directed NBFCs, to cease from sanctioning and disbursing loans.

RBI Takes Action Against Select NBFCs-MFIs Over Pricing Concerns

In a significant regulatory move, the Reserve Bank of India (RBI) has directed four NBFCs, including two NBFC-Microfinance Institutions (MFIs), to cease and desist from sanctioning and disbursing loans. The action, effective from October 21, 2024, is aimed at addressing material supervisory concerns observed in the pricing policies and interest rate structures of these companies. The affected entities are:

- Asirvad Micro Finance Limited (Chennai)

- Arohan Financial Services Limited (Kolkata)

- DMI Finance Private Limited (New Delhi)

- Navi Finserv Limited (Bengaluru)

The Core Issues

The RBI’s decision is based on the excessive Weighted Average Lending Rate (WALR) and high-interest spreads these NBFCs charged over their cost of funds. These practices were found to violate the RBI Master Directions for Microfinance Loans (2022) and the Non-Banking Financial Company (Scale-Based Regulation) Directions, 2023.

In addition, the companies were observed to be in violation of various regulatory guidelines, including:

- Fair Practices Code: Ensuring transparent and fair pricing.

- Assessment of Household Income: Improper evaluation of repayment capacities.

- Income Recognition and Asset Classification (IR&AC) norms: Leading to practices such as loan evergreening and non-adherence to disclosure requirements.

- Gold Loan Portfolios: Non-compliance with core guidelines.

The Larger Impact

This regulatory crackdown highlights the RBI’s commitment to enforcing fair pricing and ethical practices within the financial sector. Over the past few months, the RBI has been proactively sensitizing NBFCs on responsible pricing, especially for small-value loans, to protect consumers from unfair practices. Despite these efforts, the mentioned NBFCs failed to comply with regulatory expectations, prompting this decisive action.

While these companies have been restricted from new loan disbursements, they are still permitted to service their existing customers and continue with collection and recovery processes as per extant guidelines. The imposed restrictions will be reviewed once these NBFCs submit satisfactory remedial actions to the RBI, ensuring their compliance with pricing policies, customer service, and risk management.

Conclusion

This action serves as a reminder to the entire NBFC sector about the importance of adhering to RBI’s regulatory framework and maintaining fair, transparent, and reasonable pricing policies. Going forward, it is critical for all financial institutions to ensure their pricing models align with the welfare of their customers while maintaining regulatory compliance.

For more updates on RBI actions and the NBFC sector, follow MandS Associates , #NBFCRegulations, #MicrofinanceIndia, and stay tuned for further information.

- Reserve Bank of India (RBI)

- Asirvad Microfinance Limited - Official Page

- @ArohanFinancial

- DMI Finance Private Limited

- NaviFI

#NBFC #RBIRegulations #Microfinance #FairLending #InterestRates #FinancialSector