New Delhi: The Reserve Bank of India (RBI) has directed four non-banking financial companies (NBFCs), including two microfinance institutions (MFIs), to halt the sanction and disbursal of new loans starting on concerns over their excessive interest rates and non-compliance with established financial regulations.

According to RBI, Asirvad Micro Finance Limited (Chennai), Arohan Financial Services Limited (Kolkata), DMI Finance Private Limited (New Delhi), and Navi Finserv Limited (Bengaluru) were directed to cease and desist from sanction and disbursal of loans, effective from close of business of October 21, 2024.

These business restrictions aim to address several supervisory concerns observed during inspections and data analysis. “This action is based on material supervisory concerns observed in the Pricing Policy of these companies in terms of their Weighted Average Lending Rate (WALR) and the Interest Spread charged over their cost of funds, which are found to be excessive and not in adherence with the regulations as laid down in the Master Direction – Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022 dated March 14, 2022 (updated as on July 25, 2022) and Master Direction – Reserve Bank of India (Non-Banking Financial Company-Scale Based Regulation) Directions, 2023, dated October 19, 2023 (updated as on March 21, 2024).

These are also found to be not in conformity with the provisions laid down under Fair Practices Code issued by the Reserve Bank,” read the RBI statement. The companies were found to be charging excessive interest rates, which did not comply with the guidelines outlined in the RBI’s regulations for microfinance loans and non-banking financial companies.

The RBI had previously urged regulated entities to ensure fair and transparent pricing, especially for small-value loans, but irregularities persisted despite these warnings. “Over the last few months, the Reserve Bank has been sensitising its Regulated Entities through various channels on the need to use their regulatory freedom responsibly and ensure fair, reasonable and transparent pricing, especially for small-value loans.

However, unfair and usurious practices continued to be seen during onsite examinations as well as from the data collected and analysed offsite,” added the statement.The companies were also found to be in violation of income recognition and asset classification norms, which led to problems like “evergreening” of loans, where new loans were used to repay old debts.

“In addition to usurious pricing, these NBFCs were variously found to be in nonadherence with the regulatory guidelines on the assessment of household income and consideration of existing/proposed monthly repayment obligations in respect of their microfinance loans. Deviations were also observed with respect to Income Recognition & Asset Classification (IR&AC) norms resulting in the evergreening of loans, conduct of gold loan portfolio, mandated disclosure requirements on interest rates and fees, outsourcing of core financial services, etc,” added the statement.

Other compliance failures included issues with managing gold loan portfolios, disclosing interest rates and fees, and outsourcing core financial services. While the RBI has restricted new loan approvals, these companies are still permitted to manage existing customer accounts and continue their loan recovery processes in line with the rules. The restrictions will not affect current borrowers, allowing for ongoing collections and servicing of existing loans.

The RBI will review the restrictions once the companies take suitable corrective measures to adhere to regulatory guidelines. This includes revising their pricing policies, improving risk management processes, and enhancing customer service and grievance redressal mechanisms.