RBI bans Sachin Bansal’s Navi Finserv and three other NBFCs from lending over pricing irregularities

The Reserve Bank of India (RBI) has temporarily barred four non-bank lenders – Sachin Bansal’s Navi Finserv, DMI Finance, Asirvad Micro Finance Ltd (backed by Manappuram Finance) and Arohan Financial Services Ltd – from approving and disbursing new RBI loans . closed on October 21, citing significant regulatory issues related to loan pricing practices.

“This action is based on significant regulatory issues observed in the pricing policies of these companies, including the weighted average lending rate (WALR) and spreads charged relative to the cost of funds, which were found to be excessive and non-compliant. India the Reserve Bank said in a statement on Thursday.

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The central bank also noted that the irregularities were not limited to pricing.

The lender failed to comply with the Fair Practice Code, breached income assessment rules and ignored loan repayment capacity norms for microfinance borrowers. The inspection also uncovered issues related to evergreening of loans, asset classification, gold loan portfolio practices and non-compliance with disclosure requirements. In addition, some banks have outsourced core financial services, exacerbating regulatory risks.

The ban hits these lenders at a critical time.

Asirvad Micro Finance is providing $1,500-crore initial public offering (IPO), a few months ago, Manoj Nambiar, managing director of Arohan Financial Services, was appointed chairman of the Microfinance Industry Network (MFIN). The crackdown is also a blow to Navi, which is still reeling from the Reserve Bank of India’s rejection of its application for a universal banking license two years ago.

Meanwhile, DMI Finance received a significant boost in August as Japan’s MUFG Bank doubled down on investments. $2,798 crore, taking its total stake to $4,712 Crores. Navi, DMI and other companies must now navigate this regulatory turmoil to maintain investor confidence and operational continuity.

In response, Navi Finserv Ltd stated that the company is committed to conducting business operations with the highest standards of compliance, customer service and transparency. “The company is reviewing the directions issued by the Reserve Bank of India and will work with them to resolve all issues raised promptly and completely.”

It added: “Over the past few months, the Reserve Bank of India has been communicating to its regulated entities through various channels the need to utilize its regulatory freedoms responsibly and ensure fair, reasonable and transparent pricing, especially for small loan.”

The RBI clarified that the restrictions apply only to new loans; affected non-banking financial companies (NBFCs) can continue to service existing customers and conduct collections as per regulatory guidelines.

“These business restrictions, particularly with respect to its pricing policies, risk management processes, customer service and grievance redressal, will be reviewed after receiving confirmation from the company that appropriate remedial measures have been taken to comply with regulatory guidelines at all times,” the RBI added.

The central bank’s crackdown follows months of intense scrutiny. In recent speeches and policy updates, Reserve Bank of India Governor Shaktikanta Das has repeatedly warned non-bank financiers and microfinance institutions about usurious interest rates.

In November last year, Das urged microfinance companies to be cautious in setting interest rates, stressing that some lenders were enjoying unusually high net interest margins.

Monetary policy in October heightened these concerns, with India’s central bank warning non-bank financial institutions against pursuing “growth at any cost” and warning that such an approach could jeopardize financial stability.

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The current situation also reflects a shift in the RBI’s approach to pricing regulation. In March 2022, the central bank removed explicit pricing caps for microcredit and instead required lenders to develop internal pricing policies approved by the board of directors. The policies are expected to include caps on interest rates and related charges, although the RBI will no longer prescribe these limits.

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The Reserve Bank of India has banned four non-bank lenders – Sachin Bansal’s Navi Finserv, DMI Finance, Manappuram Finance-backed Asirvad Micro Finance and Arohan Financial Services – from approving and disbursing loans from October 21, citing concerns over There are significant concerns over the regulation of these agencies. Loan pricing.

“This action is based on significant regulatory issues observed in the pricing policies of these companies, namely the weighted average lending rate (WALR) and spreads charged on their cost of funds, which were found to be excessive and inconsistent with the Reserve Bank of India’s said in a press release Thursday.

Based on the inspection, the RBI observed that these non-bank lenders were found guilty of charging exorbitant interest rates and not complying with regulations. These non-bank financial companies breached the provisions of the Fair Practice Code and breached rules on household income assessment and ability to repay microfinance loans. Asset classification specifications lead to deviations in loan evergreening, gold loan portfolio behavior, mandatory disclosure requirements for interest rates and fees, and outsourcing of core financial services.

The ban comes as Asirvad Finance prepares to launch a $Initial Public Offering (IPO) of Rs 1,500 Crore, Arohan Financial Services Managing Director Manoj Nambiar was appointed chairman of the Microfinance Industry Network (MFIN), a self-regulatory body for microfinance companies, in July this year. Japan’s Mitsubishi UFJ Financial Group (MUFG) made a huge bet on DMI Finance in August this year, making additional investments $2,798 crore as part of its “total investment” $4,712 Crores. The RBI restrictions are also a huge blow for Navi, which has been struggling to find its footing after regulators denied it a universal banking license two years ago.

“Navi Finserv Limited is committed to conducting business operations with the highest standards of compliance, customer service and transparency. The company is reviewing the instructions received from the Reserve Bank of India and will work with them to address all concerns raised promptly and completely .

It added: “Over the past few months, the Reserve Bank has been communicating to its regulated entities through various channels the need to use its regulatory freedoms responsibly and ensure fair, reasonable and transparent pricing, particularly for small businesses. loan.”

Nonetheless, the RBI clarified that these lenders can continue to serve existing customers and conduct collection and recovery processes as per existing regulatory guidelines.

“Upon receipt of confirmation from the company that appropriate remedial measures have been taken to comply with regulatory guidance at all times, these business restrictions, particularly in relation to its pricing policies, risk management processes, customer service and grievance redressal, will be reviewed to ensure the satisfaction of the Reserve Bank ,” it said.

The Reserve Bank of India has repeatedly warned non-bank financiers and microfinance institutions over the past few months against charging usurious interest rates. The first warning came during a speech at the FICCI-IBA conference in November last year, when Reserve Bank of India Governor Shaktikanta Das warned microfinance companies to be “sensible” in the interest rates they charge borrowers. He also observed that certain NBFC-MFIs are enjoying higher net interest margins.

In his previous monetary policy statement, Das had also warned non-banking financial companies and microfinance institutions about charging usurious interest rates on small loans. In its most recent policy in October, the Reserve Bank of India issued a strong warning to non-banks to aggressively pursue “growth at any cost”, which could pose risks to the financial stability of the economy.

Two years ago, regulators lifted pricing caps on MFI loans, relying instead on these lenders to set policies approved by their boards. In March 2022, the Reserve Bank of India said that banks, non-banks and microfinance institutions must formulate microfinance pricing policies. While such internal policies must include caps on interest rates and all other charges on microfinance, the caps will no longer be determined by the RBI.