RBI may act against more NBFCs due to obscure lending practices: Morgan Stanley

As Reserve Bank of India (RBI) on Thursday sought action against four Non Banking Financial Companies asking them to cease and desist from making new loan sanctions and disbursements, a report by Morgan Stanley suggests more lending companies might face similar scrutiny.
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The report noted that lending rates at Asirvad Microfinance, one of the impacted NBFCs, are not significantly different from other lenders, based on data provided by MFIN, an industry body for microfinance lenders.
The report observes and asks 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 rates data collated and presented by MFIN (industry body for microfinance lenders), we note that Asirvad Microfinance’s lending rates are not very different from other lenders” said the report.
RBI today took decisive action against four non-banking financial companies (NBFCs), namely Asirvad Microfinance, Arohan Financial Services, DMI Finance, and Navi Finserv.
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These companies, including two microfinance institutions (MFIs), have been directed to halt new loan approvals and disbursements starting from the close of business on October 21, 2024. This move is part of the RBI’s effort to enforce strict regulatory compliance among lenders.
The Morgan Stanley report observes that more regulatory action might follow in the sector. Although, it clarifies and believes that the RBI’s intention is not to shut down new lending by microfinance institutions and NBFCs entirely.
It says a sharp rise in credit costs was observed at Asirvad, which was also seen at other companies in the sector.
“This could mean that either lending rates, in isolation, were not the issue at Asirvad, or there is likely more action to follow across lenders. We don’t think RBI’s intent would be to shut down new lending to the sector” the report said.
RBI’s restrictions will stay in place until these NBFCs show that they have fully aligned their practices with regulatory guidelines.
The central bank’s move is seen as a signal that it is closely monitoring the sector to ensure healthy lending practices and protect borrowers from unfair treatment.
Earlier the Reserve Bank of India (RBI) Governor Shaktikanta Das has cautioned Non-Banking Financial Companies (NBFCs) to check giving incentives and fixed targets for granting loans to their employees.
RBI Governor Shaktikanta Das, while announcing the October monetary policy emphasized that such practices could negatively impact customer interests and lead to an unhealthy work culture.
“The Reserve Bank is closely monitoring these areas and will not hesitate to take appropriate actions if necessary. Self-correction by NBFCs would, however, be the desired option.” Said RBI Governor
RBI Governor expressed concern that these practices could create a high-pressure work environment, which may result in poor customer service.
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