MUMBAI: Non-bank Financial Companies (NBFCs) have never been under so much regulatory fire like they are in 2024.
To be factually correct, the Reserve Bank’s axe has fallen on even large banks such as HDFC Bank, Bank of Baroda and Kotak Mahindra in recent times. What is more noteworthy is that all these are happening right under the watch of the present governor Shaktikanta Das, whose six-year stint on the 18th floor corner office of the Mint Road Headquarters is coming to end on December 10.
Does this mean that the regulator has become hyper-active or is it that regulated entities have become less responsive to the regulatory demands? Or is it a mix of both, along with the fast-changing technological landscape that’s sweeping the financial services industry?
Analysts are in unison in placing most of the blame on the regulated entities saying the number of black-sheep is growing as the pie is galloping--there are over 9,000 RBI-registered NBFCs and close to two dozens of them are systematically important upper tier NBFCs. “It’s not a question of regulatory overarching or that the monetary authority is over-zealous in applying its breaks. The present governor has been most considerate in getting the industry views along while framing regulations,” the head of the BFSI vertical at a foreign brokerage told TNIE.
“The current RBI administration has also been more considerate before taking stern regulatory actions. What’s happening is that NBFCs in their bid to pay higher returns to their foreign/external investors are focusing only on growth at any cost. This is where they have been throwing the basic regulatory principles into the wind, so the worst breaches are spotted now,” the person cited above elaborated, seeking anonymity.
The Rogue List
Last Thursday, RBI axe fell on four more NBFCs—two microfinanciers and two non-banks, citing many a material lapse in their lending practices, with usurious loan pricing topping the list of breaches. And those facing the heat are Asirvad Micro Finance, promoted by pure-play gold loan player Manappuram Finance; Kolkata-based microfinancier Arohan Financial Services headed by Manoj Nambiar, who also is the chairman of the MFI self-regulatory body MFIN; Delhi-based non-bank DMI Finance, which only recently raised over R3,000 crore from the Japanese financial powerhouse MGUF; and Navi Finserv, the non-bank founded by the Flipkart co-founder Sachin Bansal. RBI banned these companies from sanctioning and disbursing new loans. The problem runs deep as several NBFCs and lending apps are accused of usurious loan pricing and employing heavy-armed recovery methods including physical threats and social media humiliation, which have taken many lives in recent years.
In January, RBI axe fell the deepest on Paytm Payments Bank when it asked the firm founded by Vijay Shekhar Sharma, to virtually cease operations from March for persistently ignoring its warnings. The ban still continues.
In March 2024, JM Financial was banned from financing against shares and debentures citing serious regulatory deficiencies in loan sanctioning process. The curbs were lifted last week. In April, Kotak Mahindra Bank felt the deepest RBI axe after it was barred from issuing new credit cards and also any mode of digital loan sales, including its mobile app, citing serious shortcomings in the bank’s IT infra. The ban still continues.
Charges Against NBFCs
The main complaint against these lenders is about charging exorbitant interest charges from customers.
RBI said its ban is based on material supervisory concerns seen in their loan pricing policy in terms of weighted average lending rate and interest spread charged over their cost of funds, which are found to be highly in excess of regulations. In the monetary policy statement on October 9, governor Das cautioned NBFCs and MFIs, about prioritising excessive equity returns and expressed concern over exorbitant interest rates coupled with high processing fees and frivolous penalties.
Though interest rates are not regulated by RBI for NBFCs, the rates beyond a certain level are seen excessive saying this cannot be sustainable and against normal financial practices. However, RBI had capped interest rates for MFIs at 28% or 10 percentage points more than their cost of funds in 2011 after the SKS Microfinance crisis and the Andhra legislation banning recovery following this crisis.
After the industry stabilised, it was brought down to 24%. The biggest charges against these four companies are higher interest rates and higher interest spread citing cost of funds.