RBI Orders ‘Cease and Desist’ on 4 NBFCs Over Usurious Pricing and Regulatory Deviations

RBI Orders ‘Cease and Desist’ on 4 NBFCs Over Usurious Pricing and Regulatory Deviations

Sub: Eco

Sec: Monetary Policy

• Action by RBI:
  • The Reserve Bank of India (RBI) has issued a ‘cease and desist’ order to four non-banking financial corporations (NBFCs).
  • The action is taken due to usurious pricing and other regulatory violations observed in their lending practices.
• NBFCs Involved:
  • The four NBFCs named by the RBI are:
    • Asirvad Micro Finance Ltd. (MFI arm of Manappuram Finance Ltd.)
    • Arohan Financial Services Ltd.
    • DMI Finance Private Ltd. (backed by Mitsubishi UFJ Financial Group)
    • Navi Finserv Ltd.
• Reasons for Action:
  • Material supervisory concerns were noted in the pricing policy of these companies, particularly their Weighted Average Lending Rate (WALR) and the interest spread over their cost of funds.
  • Violations were identified in several areas:
    • Usurious pricing practices.
  • Non-compliance with regulatory guidelines on:
    • Assessment of household income.
    • Consideration of existing or proposed monthly repayment obligations in microfinance.
  • Additional deviations, including:
    • Evergreening of loans (renewing or extending loans to avoid recognizing defaults).
    • Practices related to the gold loans portfolio.
    • Mandated disclosure requirements for interest rates and fees.
    • Outsourcing of core financial services, contrary to regulatory norms.
  • Implementation of Restrictions:
    • The business restrictions on these NBFCs will take effect from October 21, 2024.
    • These curbs will not affect services to existing customers.
    • The restrictions will be reviewed once the RBI is satisfied with the remedial actions taken by these companies.
  • Response from NBFCs:
    • Navi Finserv and Asirvad Microfinance have acknowledged the RBI’s action:
    • They have stated that they value the feedback and will work towards addressing the concerns raised.
    • Asirvad has called for an urgent board meeting to monitor and implement corrective actions within a time-bound plan.
  • Implications:
    • This regulatory action underscores the RBI’s commitment to protect borrowers from unfair lending practices.
    • It highlights the importance of strict compliance with guidelines to ensure ethical conduct and transparency in financial services.

Evergreening of Loans

Evergreening loans is a practice where new or additional loans are extended to borrowers who are unable to repay existing loans. This method effectively conceals the actual status of non-performing assets (NPAs) or bad loans. It is often referred to as a form of zombie lending, as it allows financially distressed borrowers to continue operating without addressing underlying financial issues.