RBI bars Navi Finserv, 3 other NBFCs from sanctioning and disbursing loans

Ban includes 2 micro lenders, comes into effect from October 21

The Reserve Bank of India (RBI) has barred four non-banking finance companies (NBFCs), including two microfinance institutions (MFIs), from sanctioning and disbursing loans for charging exorbitant interest rates to the borrowers.

These four entities are Asirvad Microfinance, Arohan Financial Services (also an MFI), DMI Finance, which provides personal, consumption, and micro, small and medium enterprises loans, and Flipkart co-founder Sachin Bansal’s Navi Finserv, which offers home and personal loans.

The ban will take effect on October 21 to “facilitate closure of transactions in the pipeline”, the regulator said in a statement.

In the monetary policy statement on October 8, RBI Governor Shaktikanta Das cautioned NBFCs, including MFIs, about prioritising excessive equity returns. He expressed concern over exorbitant interest rates coupled with high processing fees and frivolous penalties.

“This action is based on material supervisory concerns observed in the pricing policy of these companies in terms of their weighted average lending rate (WALR) and the interest spread charged over their cost of funds, which are found to be excessive and not in adherence with the regulations,” the RBI said while citing reason for its action on Thursday.

According to microfinance industry sources, the regulator carried out detailed inspections of all NBFC-MFIs in the first quarter of the current financial year.  “They specifically wanted to know about the pricing policy and rates of interest charged to customers during the inspection,” said a senior official from the industry.

A Navi Finserv spokesperson said the company was “committed to conducting its business operations with the highest standards of compliance, customer service, and transparency”. “The company is reviewing the directions received from the RBI and will work with them, and address all the concerns raised with promptness and completeness,” the spokesperson said.

The RBI has been sensitising these entities through various channels to use their regulatory freedom responsibly and ensure fair, reasonable, and transparent pricing, especially for small value loans. “However, unfair and usurious practices continued to be seen during the course of onsite examinations as well as from the data collected and analysed offsite,” it said.

Besides usurious pricing, the RBI found these NBFCs non-compliant with regulatory guidelines on assessing household income and considering borrowers’ existing and proposed monthly repayment obligations. “Deviations were also observed in respect of Income Recognition & Asset Classification norms, resulting in evergreening of loans, conduct of gold loan portfolio, mandated disclosure requirements on interest rates and fees, outsourcing of core financial services, etc,” it said.

The RBI has clarified that these NBFCs can continue servicing existing customers and manage collections and recoveries. The business restrictions will be reviewed once the companies confirm that they have taken suitable remedial measures to comply with pricing policies, risk management, customer service, and grievance redressal guidelines.

In February, RBI Deputy Governor M Rajeshwar Rao came down heavily on MFIs for charging higher rates to borrowers and unjustifiably increasing their margins.

Following regulatory warnings, the MFI self-regulatory organisations (SROs) took corrective steps. Earlier this month, the Microfinance Industry Network announced it would review compliance with norms limiting the number of lenders per borrower to four and capping total microfinance indebtedness at Rs 2 lakh.

Another SRO, Sa-Dhan, had advised MFIs to refrain from lending to households already exposed to microfinance loans exceeding Rs 2 lakh to prevent over-leveraging.

Reasons for ban

Excessive rate of interest and interest spread
 

Non-compliance with assessment of household income, consideration of existing/proposed monthly repayment obligations for microfinance loans
 

Not adhering with income and asset classification norms 
 

Non-compliance with respect to conduct of gold loans