RBI action on 4 NBFCs: Microfinance SRO makes a pitch for 4% cap on RoA

Issues advisory for reviewing pricing policy

Following a regulatory crackdown on four non-banking financial companies (NBFCs), including two microfinance institutions, for charging “usurious” interest rates, a self-regulatory organisation (SRO) has asked its members to limit their return on assets (RoA) to 4 per cent.

Sa-Dhan, the Reserve Bank of India (RBI)-appointed SRO overseeing microfinance institutions, according to sources, has suggested its members to reassess the interest rates applied to microfinance customers. “We have told them that the RoA should not exceed 4 per cent. RoA of 3-4 per cent is considered appropriate,” according to a source familiar with the matter.

Sa-Dhan, which counts 80-85 NBFC-MFIs among its members, will gather data on interest rates and related practices to review loan pricing policies across the sector. This comes as the RBI looks to intensify scrutiny of the microfinance sector, following revelations that several institutions were not adhering to fair practice norms and imposing excessive rates on borrowers.

Last week, the RBI directed four NBFCs — Asirvad Micro Finance, Arohan Financial Services, DMI Finance, and Navi Finserv — to halt their loan sanction and disbursement operations over usurious interest rates they were charging from microfinance borrowers. These entities were also found in breach of multiple regulatory norms.

The crackdown comes two years after the RBI deregulated pricing policies for microfinance. Onsite supervision revealed that many lenders were maintaining a spread of 12 per cent, with weighted average lending rates in the 26-28 per cent range. Some lenders were maintaining a spread of 14 per cent, and faced regulatory action.

Sa-Dhan is set to meet with its members during a national conference in New Delhi this week to assess the situation.

According to a quarterly report of Sa-dhan, as of June 30, 2024, microlenders’ combined microcredit portfolio stood at Rs 4.33 trillion, up 20.27 per cent year-on-year.

In this space, NBFC-MFIs are in the lead with a microcredit portfolio of Rs 1.71 trillion and a market share of 39.6 per cent; banks have a portfolio of Rs 1.40 trillion and a market share of 32.3 per cent. With regards to total number of loan accounts, NBFC-MFIs are ahead with 40.04 per cent market share, followed by banks at 33.33 per cent.

Announcing the monetary policy review earlier this month, RBI Governor Shaktikanta Das commented that NBFCs, sometimes under pressure from their investors, are “chasing excessive returns on their equity”.

In addition to overcharging borrowers, the NBFCs that faced RBI action were found violating several norms, including improper assessment of household income and failure to consider borrowers' existing or proposed repayment obligations.

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