Reserve Bank may act against more NBFCs to keep obscure lending practices in check, says Morgan Stanley

On Thursday, the Reserve Bank of India (RBI) sought action against four non-banking financial companies (NBFCs), barring them from making new loan sanctions and disbursements, effective October 21, 2024. Now, a report by Morgan Stanley suggests that more lending companies might face similar scrutiny in the coming days.

As named by RBI in its order yesterday, Asirvad Microfinance, Arohan Financial Services, DMI Finance, and Navi Finserv had failed to adhere to the Fair Practices Code, and did not properly assess borrowers income and repayment capacities before disbursing loans.

Additionally, these companies also resorted to dubious asset classifications and incomplete interest rate and fee disclosures, which in turn led to alarming practices like loan evergreening and more.

Earlier this month, the apex had already issued a stern warning to the NBFC sector, discouraging them from pursuing aggressive loan book expansion at the cost of regulations and fair practices. Per the bank, it would be ideal if NBFCs self-corrected their ways and refrained from giving incentives and fixed targets for granting loans to their employees.

As for these four NBFCs, RBI flagged significant deviations with respect to Income Recognition and Asset Classification (IR&AC) norms in their functioning, and gross mismanagement of their gold loan portfolios.

As RBI noted, these NBFCs had outsourced several of their core financial services as well. The restrictions on these 4 NBFCs will be effective at the close of business as of October 21, 2024. But this will not affect the existing, active loans of the companies. Also, loan collection and recovery processes will also continue in line with existing guidelines.

However, Morgan Stanley, in a recent report, has questioned this move, asking whether lending rates alone were the cause for concern by RBI against specified NBFCs or whether broader issues are at play.

"Based on an observation of lending rate data collated and presented by MFIN (the industry body for microfinance lenders), we note that Asirvad Microfinance's lending rates are not very different from other lenders," the report said.

The report also observes that more regulatory action might follow in the sector, but the intention here was not to shut down new lending by microfinance institutions and NBFCs entirely. RBI's restrictions will stay in place until these NBFCs show that they have fully aligned their practices with regulatory guidelines.

In response, Navi Finserv Limited has noted that it is 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 Hon’ble Reserve Bank of India and will work with them and address all the concerns raised with promptness and completeness," it further added.