• The Reserve Bank of India (RBI) has imposed restrictions on four Non-Banking Financial Companies (NBFCs) due to material supervisory concerns.
• The NBFCs, including Asirvad Micro Finance Ltd and Navi Finserv, are barred from sanctioning and disbursing loans from October 21, 2024.
• The restrictions are based on concerns about the companies' pricing policy and non-compliance with the Fair Practices Code.
• The RBI's action underscores the importance of regulatory compliance and the need for financial institutions to adhere to fair practices.

The Reserve Bank of India (RBI) has taken a significant step by imposing restrictions on four Non-Banking Financial Companies (NBFCs) - Asirvad Micro Finance Ltd, Arohan Financial Services Ltd, DMI Finance, and Navi Finserv. The central bank has cited material supervisory concerns as the reason for this action. The restrictions include barring these entities from sanctioning and disbursing loans from October 21, 2024.

The decision by the RBI is based on concerns observed in the pricing policy of these companies. The weighted average lending rate (WALR) and the interest spread charged over their cost of funds were found to be excessive and not in adherence with the regulations. The NBFCs were also found to be non-compliant with the provisions laid down under the Fair Practices Code issued by the RBI.

In addition to usurious pricing, the NBFCs were found to be in nonadherence with the regulatory guidelines on the assessment of household income and consideration of existing or proposed monthly repayment obligations in respect of their microfinance loans.

Regulatory Violations and Business Restrictions

Deviations were also observed in respect of Income Recognition & Asset Classification (IR&AC) norms resulting in evergreening of loans, the conduct of gold loan portfolio, mandated disclosure requirements on interest rates and fees, outsourcing of core financial services, among others.

The business restrictions, effective from the close of business on October 21, 2024, do not preclude these companies from servicing their existing customers and carrying out collection and recovery processes in accordance with the extant regulatory guidelines. The RBI further stated that these business restrictions will be reviewed upon receipt of confirmation from the companies regarding suitable remedial action having been taken to adhere to the regulatory guidelines.

Among the affected NBFCs, Navi Finserv is led by Sachin Bansal, the founder of Indian e-commerce giant Flipkart. The company is currently reviewing the circular and is committed to addressing all concerns raised promptly and effectively.

Impact on NBFCs and Historical Context

Asirvad Micro Finance, backed by Manappuram Finance, is gearing up for a ₹1,500 crore initial public offering (IPO). Arohan Financial Services' managing director, Manoj Nambiar, was appointed chairperson of the Microfinance Industry Network (MFIN) just a few months ago. DMI Finance had secured a significant boost in August when Japan 's MUFG Bank doubled down with an additional investment of ₹2,798 crore, bringing its total stake to ₹4,712 crore.

The RBI's action is reminiscent of the 2008 financial crisis, often called the subprime mortgage crisis, which caused a contraction of liquidity in global financial markets. The crisis originated in the United States due to the collapse of the U.S. housing market and threatened the international financial system.

Several major investment and commercial banks, mortgage lenders, insurance companies, and savings and loan associations failed and precipitated the Great Recession. In response, legislative measures were introduced to counter the financial crisis, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Emergency Economic Stabilization Act (EESA) which created the Troubled Asset Relief Program (TARP).