RBI ACTION AGAINST NBFC : ECONOMY

RBI ACTION AGAINST NBFC : ECONOMY

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

 

WHAT’S IN THE NEWS ?

· RBI Action: The RBI issued a ‘cease and desist’ order to four NBFCs due to usurious pricing and regulatory violations in lending practices.

· NBFCs Involved:

  1. Asirvad Micro Finance Ltd. (MFI arm of Manappuram Finance Ltd.)
  2. Arohan Financial Services Ltd.
  3. DMI Finance Private Ltd. (backed by Mitsubishi UFJ Financial Group)
  4. Navi Finserv Ltd.

 

· Reasons for Action:

  • Concerns over Weighted Average Lending Rate (WALR) and interest spread.
  • Violations in:
  • Usurious pricing.
  • Non-compliance with guidelines on household income and repayment obligations.
  • Evergreening of loans (renewing loans to avoid recognizing defaults).
  • Practices related to gold loans.
  • Disclosure requirements for interest rates and fees.
  • Outsourcing core financial services, against norms.

· Restrictions:

  • Effective from October 21, 2024.
  • Services to existing customers will not be affected.
  • Restrictions to be reviewed based on corrective actions by NBFCs.

· NBFCs’ Response: Navi Finserv and Asirvad Microfinance acknowledged RBI’s action and plan to address the concerns.

· Implications:

  • Reinforces RBI’s role in protecting borrowers and ensuring ethical practices.
  • Stresses the need for strict compliance with financial guidelines.

· Evergreening of Loans: Extending new loans to borrowers unable to repay old ones to hide non-performing assets (NPAs).

 WHAT IS NBFC ?

·         Non Banking Financial Company (NBFCs) are company registered under the Companies Act and provide various financial services and products, including loans, insurance, and asset management, but do not have a banking license. 

·         Business areas: Business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business 

·         Does not include: Institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

·         Regulator: By RBI under RBI Act, 1934.

 

Source : https://www.thehindu.com/incoming/rbi-bars-four-nbfcs-for-usurious-pricing-orders-cease-and-desist-action/article68765733.ece