Regulators, especially those in the financial sector, need to bare their teeth from time to time. And show them that they can also bite if necessary.
The Reserve Bank of India (RBI) recently imposed business restrictions on four non-banking financial companies (NBFCs): Ashirvad Micro Finance Ltd., Arohan Financial Services Ltd., DMI Finance Ltd., and Navi Finserv Ltd. , and is calling for its suspension and cancellation. Loan approval and protection from execution are consistent with this well-stated philosophy.
According to the RBI, its measures, which will come into effect from the close of business on October 21, will be based on “the observed changes in the pricing policies of these companies in terms of the weighted average lending rate (WALR) and the interest spreads charged among them. The decision is based on “serious supervisory concerns.” The cost of funds was found to be excessive. ” Further, their pricing policies were found to be “not in compliance with the regulations laid down in the Master Direction (MD) of Banks on Microfinance Loan Regulatory Framework and Instructions on NBFC Size-Based Regulation”. The framework directly depends on the size of the NBFC.
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This is not the first time that a recalcitrant NBFC has seen a drop in batting average. Similar action was taken against JM Financial (since lifted in October 2024) and IIFL in March this year, during which the RBI had imposed sanctions against JMFPL on stocks and debentures, including sanctions and sanctions. It directed the immediate suspension of all forms of financing. Financing for initial public offerings (IPOs) of shares and underwriting of non-convertible debentures (NCDs). Also, this is not the first time that RBI has warned NBFCs for reckless behavior.
At the end of the Monetary Policy Committee meeting on October 9, RBI Governor Shaktikanta Das issued a stern warning to non-banks, especially microfinance and housing finance companies, to “grow at all costs”. He cautioned against aggressively pursuing this, warning that it could threaten monetary policy. Financial stability of the economy.
He also expressed concern that microfinance institutions (MFIs) and housing finance companies (HFCs) are imposing usurious interest rates and imprudent fines on their customers.
Accusing NBFCs of expanding retail credit in pursuit of business goals rather than lending based on actual demand, Das said, “If these NBFCs do not address, the resulting high “Costs and high levels of debt could pose risks to financial stability.” “The Reserve Bank is closely monitoring these areas and will not hesitate to take appropriate action if required,” he clarified, adding, “However, self-correction by NBFCs would be a preferable option.” he added.
Das was quick to clarify that the central bank’s concerns were not about the sector as a whole, but about a few outliers who were putting the entire system at risk.
“This message is aimed at NBFCs pursuing high-risk, high-growth strategies and specific segments that are likely to be under stress in our estimation,” Vice Governor J. Swaminathan said.
It is clear that his warnings were not heeded. Or maybe less than two weeks later, with swift RBI action. This is not surprising. Collaboration between banks and NBFCs has been strengthened, and banks’ exposure to NBFCs has increased from Rs 3.9 trillion in February 2018 to Rs 15.21 trillion (nearly three times) by December 2023, leading to an increase in major NBFCs. The systemic risks posed by a collapse cannot be overstated. .
The turmoil following the collapses of IL&FS in 2018 and Dewan Housing in 2019 serves as a stark reminder of the potential fallout.
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The financial sector is in a unique position compared to other industries. As the US subprime crisis vividly demonstrated, contagion effects mean that the failure of one major company can cause the failure of many others, putting the entire financial sector and economy at risk. means. The financial sector is not the Wild West. There’s no place for cowboys here, and if RBI has to play sheriff, it’s for the greater good.
