The Reserve Bank of India has imposed business restrictions on four non-banking finance companies (NBFCs) – Asirvad Micro Finance Ltd, Arohan Financial Services Ltd, DMI Finance Pvt Ltd and Navi Finserv Ltd, asking them to cease and desist from sanction and disbursal of loans.

The central bank said its action, which is effective from close of business of October 21, 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 were found to be excessive.

Further, their pricing policy is not in adherence with the regulations as laid down in the Master Direction (MD) relating to regulatory framework for microfinance loans and MD relating to NBFC-scale based regulation.

The pricing policy was also found to be not in conformity with the provisions laid down under Fair Practices Code issued by the Reserve Bank, per an RBI statement.

The central bank said the business restrictions have been made effective from the close of business on October 21, to facilitate closure of transactions in the pipeline, if any.

These business restrictions do not preclude these companies from servicing their existing customers and carrying out collection and recovery processes in accordance with the extant regulatory guidelines. Within the NBFC space, Asirvad Micro Finance Ltd and Arohan Financial Services Ltd are classified as mirofinance institutions, and DMI Finance Pvt Ltd and Navi Finserv Ltd are classified as investment & credit companies.

It may be pertinent to mention here that in his latest bi-monthly monetary policy statement, RBI Governor Shaktikanta Das noted that some NBFCs were aggressively pursuing growth without building up sustainable business practices and risk management frameworks, commensurate with the scale and complexity of their portfolio.

He cautioned that an imprudent ‘growth at any cost’ approach would be counter productive for their own health.

Das also highlighted that driven by the significant accretion to their capital from both domestic and overseas sources, and sometimes under pressure from their investors, some NBFCs – including microfinance institutions (MFIs) and housing finance companies (HFCs) – are chasing excessive returns on their equity.

“While such pursuits are in the domain of the Boards and Managements of NBFCs, concerns arise when the interest rates charged by them become usurious and get combined with unreasonably high processing fees and frivolous penalties.

“These practices are sometimes further accentuated by what appears to be a ‘push effect’, as business targets drive retail credit growth rather than its actual demand. The consequent high-cost and high indebtedness could pose financial stability risks, if not addressed by these NBFCs,” he said.

Unfair practices

In its statement on the action against the aforementioned NBFCs, RBI said over the last few months, it has been sensitising 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 the course of onsite examinations as well as from the data collected and analysed offsite.

The central bank said the business restrictions against the four NBFC will be reviewed upon receipt of confirmation from them regarding suitable remedial action having been taken to adhere to the regulatory guidelines at all times, more particularly their pricing policy, risk management processes, customer service and grievance redressal aspects.

Don’t miss reading our explainer on the issue.

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