RBI halts new loans for four NBFCs over excessive interest rates

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The Reserve Bank of India (RBI) has taken decisive action against four non-banking financial companies (NBFCs), including two microfinance institutions (MFIs), by ordering them to cease the sanction and disbursement of new loans. This action comes in response to concerns over excessive interest rates and violations of financial regulations.

The RBI named Asirvad Micro Finance Limited (Chennai), Arohan Financial Services Limited (Kolkata), DMI Finance Private Limited (New Delhi), and Navi Finserv Limited (Bengaluru) among the companies directed to stop loan activities. The ban became effective at the close of business on October 21, 2024.

According to the RBI, the decision stems from material supervisory concerns regarding the companies’ pricing policies, specifically their Weighted Average Lending Rate (WALR) and the interest spread over their cost of funds. The RBI determined that these rates were excessive and non-compliant with established regulations.

“This 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,” the RBI stated. These violations were tied to the guidelines outlined in the Master Direction – Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022, and the Non-Banking Financial Company-Scale Based Regulation Directions, 2023.

The companies were found to be charging interest rates that did not comply with RBI regulations for microfinance loans and NBFCs. Despite warnings, the irregularities persisted, leading the central bank to take firm action.

Over the past few months, the RBI had been urging regulated entities to adopt fair pricing policies, particularly for small-value loans, but non-compliance continued. “Over the last few months, the Reserve Bank has been sensitising its Regulated Entities… to 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 analysed offsite,” the RBI added.

Additional violations included non-compliance with income recognition and asset classification norms. The companies engaged in “evergreening” loans, where new loans were issued to repay old debts, further complicating the financial health of their portfolios. “In addition to usurious pricing, these NBFCs were variously found to be in non-adherence with the regulatory guidelines on the assessment of household income… Deviations were also observed with respect to Income Recognition & Asset Classification (IR&AC) norms resulting in the evergreening of loans,” the statement explained.

Other compliance issues included mismanagement of gold loan portfolios, failure to disclose interest rates and fees, and outsourcing of core financial services.

Although the RBI has prohibited these companies from approving new loans, they are still allowed to manage existing accounts and continue loan recovery in accordance with the rules. Borrowers with existing loans will not be affected by the restrictions.

The central bank will review the situation once the companies implement corrective measures to comply with regulatory guidelines. This includes adjusting pricing policies, improving risk management, and enhancing customer service and grievance redressal mechanisms.