On Thursday, the Reserve Bank of India (RBI) has imposed strict regulatory actions on four non-banking financial companies (NBFCs) – Asirvad Micro Finance Ltd, Arohan Financial Services Ltd, DMI Finance, and Navi Finserv – due to significant supervisory concerns.
These actions, effective from 21 October 2024, prevent the NBFCs from issuing or disbursing new loans until further notice.
The RBI’s decision follows the discovery of irregularities in these firms’ pricing policies, particularly related to their weighted average lending rate (WALR) and interest spreads.
According to the RBI, these NBFCs charged disproportionately high rates that violated the central bank’s regulations.
Regulators also found that the companies did not comply with the Fair Practices Code, particularly in assessing household income and borrowers’ ability to meet existing or proposed loan repayment obligations for microfinance loans.
In addition to pricing concerns, the RBI uncovered violations of regulatory norms concerning income recognition and asset classification, which led to practices such as evergreening of loans – a method used to mask bad loans.
Other issues included the mismanagement of gold loan portfolios, failure to meet mandatory disclosure requirements related to interest rates and fees, and improper outsourcing of core financial services.
Although restricted from disbursing new loans, these NBFCs can continue servicing existing customers, including conducting collection and recovery activities, as long as they comply with current regulations.
The RBI emphasized that these restrictions will remain in place until the companies take corrective measures to align their practices with regulatory guidelines.
This includes improvements in pricing policies, risk management, customer service, and grievance resolution mechanisms.
The restrictions will only be lifted once the RBI is satisfied that the necessary reforms have been implemented.
These developments come as part of the RBI’s ongoing efforts to ensure transparency and fairness in the financial sector, especially in the microfinance industry, where vulnerable borrowers are most at risk from predatory lending practices.
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