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Reserve Bank of India (RBI) has directed four non-banking financial companies (NBFCs), including two microfinance institutions (MFIs), to halt the sanctioning and disbursement of new loans due to concerns over their excessive interest rates and non-compliance with established financial regulations. The companies involved are Asirvad Micro Finance Limited (Chennai), Arohan Financial Services Limited (Kolkata), DMI Finance Private Limited (New Delhi), and Navi Finserv Limited (Bengaluru). The RBI's directive is effective from the close of business on October 21, 2024.These restrictions aim to address several supervisory concerns identified during inspections and data analysis. According to the RBI, the action is based on significant supervisory issues observed in these companies' pricing policies, specifically regarding their Weighted Average Lending Rate (WALR) and the interest spread charged over their cost of funds. These rates were deemed excessive and non-compliant with the regulations laid out in the "Master Direction - Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022," dated March 14, 2022 (updated as of July 25, 2022), and the "Master Direction - Reserve Bank of India (Non-Banking Financial Company-Scale Based Regulation) Directions, 2023," dated October 19, 2023 (updated as of March 21, 2024). The practices also violated the provisions outlined in the Fair Practices Code issued by the Reserve Bank.Also Read: Adani Enterprises raises USD 500 million primary equity to further its growth plansThe RBI discovered that these companies were charging excessive interest rates that did not comply with the guidelines established for microfinance loans and non-banking financial companies. Although the RBI had previously urged regulated entities to ensure fair and transparent pricing, particularly for small-value loans, irregularities continued to persist despite these warnings. In the RBI's statement, it was noted, "Over the last few months, the Reserve Bank has been sensitizing its regulated entities through various channels on the need to use their regulatory freedom responsibly and ensure fair, reasonable, and transparent pricing, especially for small-value loans. However, unfair and usurious practices continued to be seen during onsite examinations as well as from the data collected and analyzed offsite."Moreover, the companies were found to be in violation of income recognition and asset classification norms, resulting in issues such as the "evergreening" of loans, where new loans were used to repay old debts. The RBI's statement further elaborated on this issue, stating, "In addition to usurious pricing, these NBFCs were variously found to be in nonadherence with the regulatory guidelines on assessing household income and considering existing or proposed monthly repayment obligations for their microfinance loans." Other deviations included non-compliance with Income Recognition & Asset Classification (IR&AC) norms, the management of gold loan portfolios, adherence to mandated disclosure requirements concerning interest rates and fees, and the outsourcing of core financial services.Though the RBI has restricted new loan approvals, these companies are still allowed to manage existing customer accounts and continue their loan recovery processes in accordance with regulations. The restrictions will not affect current borrowers, enabling ongoing collections and servicing of existing loans. RBI will review the restrictions once these companies take appropriate corrective measures to comply with regulatory guidelines. This includes revising their pricing policies, improving risk management processes, and enhancing customer service and grievance redressal mechanisms.Disclaimer: This post has been auto-published from an agency feed without any modifications to the text and has not been reviewed by an editor

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