RBI
ACTION AGAINST NBFC : ECONOMY
NEWS
:
RBI Orders ‘Cease and Desist’ on 4 NBFCs Over Usurious Pricing and Regulatory
Deviations
WHAT’S
IN THE NEWS ?
· RBI Action: The RBI
issued a ‘cease and desist’ order to four NBFCs due to usurious pricing and
regulatory violations in lending practices.
· NBFCs Involved:
- Asirvad Micro Finance Ltd.
(MFI arm of Manappuram Finance Ltd.)
- Arohan Financial Services
Ltd.
- DMI Finance Private Ltd.
(backed by Mitsubishi UFJ Financial Group)
- Navi Finserv Ltd.
· Reasons for Action:
- Concerns over Weighted
Average Lending Rate (WALR) and interest spread.
- Violations in:
- Usurious pricing.
- Non-compliance with
guidelines on household income and repayment obligations.
- Evergreening of loans (renewing loans to avoid
recognizing defaults).
- Practices related to gold
loans.
- Disclosure requirements for interest rates and
fees.
- Outsourcing core financial
services,
against norms.
· Restrictions:
- Effective from October
21, 2024.
- Services to existing
customers will not be affected.
- Restrictions to be reviewed
based on corrective actions by NBFCs.
· NBFCs’ Response: Navi
Finserv and Asirvad Microfinance acknowledged RBI’s action and plan to address
the concerns.
· Implications:
- Reinforces RBI’s role in protecting
borrowers and ensuring ethical practices.
- Stresses the need for strict
compliance with financial guidelines.
· Evergreening of Loans:
Extending new loans to borrowers unable to repay old ones to hide
non-performing assets (NPAs).
WHAT IS NBFC ?
·
Non Banking Financial Company (NBFCs) are
company registered under the Companies Act and provide various
financial services and products, including loans, insurance, and asset
management, but do not have a banking license.
·
Business
areas: Business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local
authority or other marketable securities of a like nature, leasing,
hire-purchase, insurance business, chit business
·
Does
not include: Institution whose principal business is
that of agriculture activity, industrial activity, purchase or sale of any
goods (other than securities) or providing any services and
sale/purchase/construction of immovable property.
·
Regulator: By RBI under RBI Act,
1934.