RBI Intensifies Scrutiny of Microfinance Lenders, Addresses Concerns Over High Interest Rates

The Reserve Bank of India (RBI) is taking stringent measures to curb excessive interest rates charged by microfinance lenders. Following the recent imposition of restrictions on four non-bank entities, the RBI is now seeking detailed monthly data on their weighted average lending rates and spreads over their cost of funds. This move aims to protect vulnerable borrowers, especially women from low-income households, from predatory lending practices. The RBI’s actions come in response to numerous cases where the margin on the cost of funds for microfinance loans has exceeded the previously set cap of 12 percent. This indicates a clear shift in the RBI’s stance towards microfinance lenders, emphasizing responsible lending and fair treatment of borrowers.

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RBI Intensifies Scrutiny of Microfinance Lenders, Addresses Concerns Over High Interest Rates

Navi Finserv cancels bond issue

RBI Intensifies Scrutiny of Microfinance Lenders, Addresses Concerns Over High Interest Rates Bengaluru-based non-banking finance company (NBFC) Navi Finserv has canceled its plan to issue bonds worth Rs 100 crore, which was set for bidding on Monday, according to two sources familiar with the matter. The company intended to raise this amount through the domestic debt capital market with bonds that had a 27-month maturity and were rated ‘A’ by CRISIL, a domestic rating agency.

This decision follows a recent action by the Reserve Bank of India (RBI), which prohibited Navi Finserv and three other NBFCs, including two microfinance institutions (MFIs), from granting loans due to concerns over excessively high interest rates charged to borrowers. The other affected entities are Asirvad Microfinance, Arohan Financial Services (also an MFI), and DMI Finance, which provides loans for personal, consumption, and small businesses.

Navi Finserv, a digital-first NBFC, offers personal and home loans, as well as financial assistance for emergency medical expenses and short-term business needs. The firm is backed by Sachin Bansal, co-founder of Flipkart. Navi stated its commitment to conducting business with high standards of compliance, customer service, and transparency, adding that it is reviewing the RBI’s directives and will work to address the concerns raised.

RBI Intensifies Scrutiny of Microfinance Lenders, Addresses Concerns Over High Interest Rates  Shobhit Agarwal, Head of Lending at Navi Finserv, mentioned that the company has a strong liquidity position and determined that there was no immediate necessity for external funding, leading to the cancellation. In a monetary policy statement on October 8, RBI Governor Shaktikanta Das warned NBFCs, including MFIs, to avoid prioritizing excessive equity returns, expressing concerns over high interest rates, processing fees, and unreasonable penalties.

The RBI’s release noted that it has been alerting regulated entities about the need for responsible use of regulatory freedom and ensuring fair pricing, especially for small loans. Despite this, the central bank found continued unfair practices during examinations and data analysis. The restrictions on these businesses will take effect at the end of business on October 21, 2024, allowing for the closure of any pending transactions. However, these companies can still service existing customers and carry out collections in line with current regulatory guidelines. The RBI will review these restrictions once the companies confirm they have taken appropriate remedial actions to comply with regulatory standards regarding pricing, risk management, customer service, and grievance redressal.

RBI Intensifies Scrutiny of Microfinance Lenders, Addresses Concerns Over High Interest Rates  Non-bank players in the microfinance sector may face increased reporting requirements as the Reserve Bank of India (RBI) is expected to request detailed monthly data on their weighted average lending rates and the spread over their cost of funds. This move aims to prevent lenders from exploiting vulnerable borrowers, particularly women from low-income households.

Since the RBI granted non-bank entities the freedom to price small-value loans in 2022, it has identified numerous cases where the margin (spread) on their cost of funds has exceeded the previously set cap of 12 percent. This observation is based on the regulator’s inspections of these institutions during FY23 and FY24. Consequently, the RBI recently imposed restrictions on four non-bank players—Asirvad Micro Finance Ltd, Arohan Financial Services Ltd, DMI Finance Pvt Ltd, and Navi Finserv Ltd—prohibiting them from sanctioning or disbursing loans. The entities required to provide the aforementioned data will include non-banking finance company-microfinance institutions (NBFC-MFIs) and NBFCs that operate MFIs as part of their business.

RBI officials anticipated that the regulatory flexibility offered to non-bank players in March 2022 would benefit small borrowers by fostering competition and making loans more affordable. However, this expectation has not materialized. The recent actions against the four non-bank entities, noted as extreme outliers regarding the spreads they charged and the number of loans issued to individual borrowers, signal the RBI’s intention to caution other non-bank players in the microfinance ecosystem against prioritizing high profits at the expense of small borrowers.

RBI Intensifies Scrutiny of Microfinance Lenders, Addresses Concerns Over High Interest Rates  RBI Governor Shaktikanta Das recently warned NBFCs that an imprudent “growth at any cost” mentality would ultimately be detrimental to their stability. According to data from the Microfinance Industry Network (MFIN), among its 73 members, CreditAccess Grameen reported the lowest average interest rate at 21.38 percent for Q4 FY24, while SV Creditline had the highest at 28.87 percent for Q1 FY25.

The microfinance industry had a total portfolio of ₹4,20,256 crore as of June 2024, with NBFC-MFIs accounting for 40 percent, followed by banks at 33 percent, small finance banks at 17 percent, and NBFCs at 10 percent, according to MFIN. The average loan size stood at ₹48,322. There are about 100 pure-play NBFC-MFIs, with 15 classified as large, and around 200 NBFCs that include MFI as one of their business lines. Industry sources indicate that several players still have spreads exceeding the earlier cap of 12 percent.