RBI Slaps Loan Ban on 4 NBFCs Over Excessive Interest Rates- Four companies face regulatory action for charging exorbitant rates

RBI Slaps Loan Ban on 4 NBFCs Over Excessive Interest Rates- Four companies face regulatory action for charging exorbitant rates.

RBI suspends NBFC loans

The Reserve Bank of India (RBI) has imposed strict regulatory actions on four Non-Banking Financial Companies (NBFCs), suspending their ability to sanction and disburse loans starting from October 21, 2024. The affected NBFCs include Asirvad Micro Finance Limited, Arohan Financial Services Limited, DMI Finance Private Limited, and Navi Finserv Limited. This decision was made under Section 45L(1)(b) of the RBI Act, 1934, due to concerns over their loan pricing practices and regulatory violations.

The RBI highlighted that these companies were charging interest rates that exceeded permissible limits, violating the Master Directions for Microfinance Loans (revised in July 2022) and the Non-Banking Financial Company–Scale Based Regulation guidelines (updated in March 2024). The central bank raised concerns about their Weighted Average Lending Rate (WALR) and Interest Spread over the cost of funds.

Despite previous warnings, the RBI observed ongoing unfair pricing and excessive interest rates during its inspections and data reviews. Additionally, these NBFCs were found to have inadequately assessed borrowers’ household incomes and repayment capacities, leading to the risky approval of microfinance loans that could jeopardize both the borrowers and the companies’ financial stability.

RBI Slaps Loan Ban on 4 NBFCs Over Excessive Interest Rates The RBI’s actions are a significant setback for Asirvad Micro Finance, Arohan Financial Services, DMI Finance, and Navi Finserv. These NBFCs will now need to prioritize compliance by revising their pricing policies and ensuring that loans are sanctioned based on proper assessments of household incomes and repayment capacities. Until these corrective steps are taken and reviewed, the companies will not be permitted to resume their loan disbursal activities.

However, the restriction does not affect their ability to service existing customers. Loan collection and recovery efforts can continue as long as they adhere to the current regulatory framework. The RBI has confirmed that the restrictions will be lifted once these NBFCs demonstrate full compliance with key areas such as risk management, customer service, and fair pricing practices.

RBI Slaps Loan Ban on 4 NBFCs Over Excessive Interest Rates  For current borrowers of these NBFCs, the immediate impact is minimal. Repayment schedules will continue as usual, and existing loans remain unaffected. However, the pause on new loan disbursals could pose challenges for future borrowers, particularly those dependent on microfinance loans from these institutions.

The RBI clarified that the restrictions, effective from the close of business on October 21, 2024, allow for the completion of any pending transactions. While existing customers will still be serviced and collections will proceed in line with regulatory guidelines, new loan approvals and renewals are on hold until these NBFCs achieve regulatory compliance.

As a result, prospective borrowers may face delays and could be forced to seek loans from other financial institutions, which may offer different rates or impose stricter eligibility requirements.

RBI Slaps Loan Ban on 4 NBFCs Over Excessive Interest Rates  The RBI’s actions have already impacted the financial market, leading several brokerages to revise their ratings on the affected NBFCs. One significant reaction is the downgrade of Manappuram Finance, which has a major stake in Asirvad Micro Finance. Many brokerage firms have lowered their price targets and profitability projections for Manappuram, citing concerns over the RBI’s restrictions and their potential impact on long-term earnings.

CLSA maintained its “outperform” rating for Manappuram but reduced the price target from Rs 240 to Rs 200, noting that Asirvad represents 25% of the company’s total Assets Under Management (AUM). Morgan Stanley took a more cautious stance, downgrading Manappuram from “Overweight” to “Equalweight” and lowering its price target to Rs 170. The firm also cut its consolidated earnings forecasts by 20% for FY2025 and by 30% for FY2026 and FY2027.

Similarly, Jefferies downgraded Manappuram to a “hold” rating and reduced its price target to Rs 167, expressing concerns that Manappuram may need to provide additional capital to Asirvad if defaults increase due to the regulatory restrictions.

RBI Slaps Loan Ban on 4 NBFCs Over Excessive Interest Rates  In response to the RBI’s directive, the affected NBFCs have issued statements expressing their commitment to regulatory compliance.

A Navi Finserv spokesperson stated, “We are reviewing the RBI’s circular and are dedicated to promptly and effectively addressing all concerns raised. Customer care and compliance remain our top priorities.”

Asirvad Microfinance shared a similar stance, announcing, “We appreciate the feedback from the RBI and have convened an urgent board meeting to address the concerns. We are fully committed to implementing the RBI’s directives and ensuring timely compliance.”

RBI Slaps Loan Ban on 4 NBFCs Over Excessive Interest Rates  The RBI’s actions have placed immediate pressure on the affected NBFCs, but their long-term impact will depend on how swiftly and effectively they comply with regulatory guidelines.

In its statement, the RBI said, “These business restrictions will be reviewed once the companies confirm that they have taken appropriate remedial action to fully adhere to regulatory guidelines, particularly in areas such as pricing policies, risk management, customer service, and grievance redressal, to the satisfaction of the Reserve Bank.”

For customers, the main consequence is a potential delay in accessing new loans, although existing loans remain unaffected.

RBI Slaps Loan Ban on 4 NBFCs Over Excessive Interest Rates  The RBI has taken decisive action against four NBFCs—Asirvad Micro Finance Limited, Arohan Financial Services Limited, DMI Finance Private Limited, and Navi Finserv Limited—under Section 45L(1)(b) of the Reserve Bank of India Act, 1934. These companies have been directed to halt loan sanctioning and disbursement activities starting from the close of business on October 21, 2024.

The RBI identified issues with their pricing policies, particularly regarding their Weighted Average Lending Rate (WALR) and the Interest Spread over their cost of funds. The central bank found that the rates charged by these NBFCs were excessively high and non-compliant with regulatory guidelines. In addition, these companies failed to adhere to regulations for assessing household income and accounting for current or future repayment capacities when granting microfinance loans.

The RBI stated, “This action is based on supervisory concerns related to the Pricing Policy of these companies, specifically regarding their Weighted Average Lending Rate (WALR) and Interest Spread, which are excessive and not in line with the Master Direction – Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022, and the Master Direction – Non-Banking Financial Company–Scale Based Regulation, 2023. These practices also violate the Fair Practices Code issued by the Reserve Bank.”

The restrictions will be reconsidered once these companies confirm they have taken the necessary steps to comply with regulatory guidelines, particularly in areas like pricing policy, risk management, customer service, and grievance resolution.