RBI Acts Against 4 NBFCs, To Keep Tracking Sector

While Finance Minister Nirmala Sitharaman and Commerce and Industry Minister Piyush Goyal have recently said that high cost of borrowing is leading to slowdown of economic growth, the RBI’s watch over the NBFC sector and the stringent regulatory requirements thrust on the lenders will not ease anytime soon.

Last month, the RBI directed the Bengaluru-based, Sachin Bansal-promoted Navi Finserv, along with New Delhi-based DMI Finance, Chennai-based Asirvad Micro Finance and Kolkata-based Arohan Financial Services, to halt lending operations, citing discrepancies in their “pricing policy”, which were found to be non-compliant with regulatory norms. A crisis in the NBFC sector can have a far-reaching impact on broader economic dynamics.

The central bank, however, said that the restrictions will be eased, once these NBFCs have taken the necessary remedial measures.

Sources said that not just pricing of loans, but instances of violation of KYC (know your customer) norms, and lack of adherence to due diligence processes, have come to light. At present, there are more than 9,000 NBFCs registered with the RBI.

The RBI’s recent clampdown on some NBFCs has prompted most other players to launch an aggressive review process to look into their internal operations and lending processes, along with pricing, to ensure that regulatory norms are not violated.

On several occasions, RBI Governor Shaktikanta Das has thrashed out warnings to NBFCs, asking them to put their house in order and take pre-emptive remedial measures to avoid regulatory actions.

Das, in October, said that the overall health of the financial services sector remains robust, and that there was no cause for any alarm, but warned the NBFCs against reckless growth and lapses in regulatory norms.

Why Are NBFCs Crucial For The Economy?

NBFCs cater to several key sectors of the economy, including the unbanked segment. Hence, a disruption in the sector can have far reaching implications on the broader economy. In 2018, the sector faced serious liquidity challenges owing to the IL&FS (Infrastructure Leasing & Financial Services Ltd.) crisis.

Any disruption in the NBFC sector would not only affect investors and erode their confidence, it will put pressure on banks and other lending agencies too. “Though India has maintained its growth, new geopolitical and geo-economic challenges in the post Covid phase have come up, several economies are struggling. Naturally, the RBI is taking a very cautious approach — this is necessary to ensure the stability and robustness of the economy,” an economist engaged with a public sector lender told The Secretariat.

Bank Credit To NBFCs

Credit costs for NBFCs have been rising after the RBI decision in November to increase risk weightage by 25 percentage points, from 100 per cent to 125.

Credit deployment to NBFCs in the April-September period declined by 1.2 per cent, compared to a growth of 4 per cent in the corresponding period in the previous financial year, RBI data revealed.

A higher risk weightage would mean that banks and NBFCs will have to set aside a higher amount for loan provisioning.

Credit deployment to NBFCs is likely to remain subdued, with RBI increasing its vigilance on their operations. Meanwhile, the NBFCs are likely to rely more on capital market instruments and private credit with fund flow from commercial banks slowing down.

At the beginning of this financial year, credit deployed to NBFCs stood at Rs 15,48,027 crore. In six months — at the end of September, the figure dropped to Rs 15,29,006 crore.

A report by ICRA pointed out that the credit costs of NBFC-MFIs (microfinance institutions) are expected to surge to the 4 per cent level by March 2025, from 2.6 per cent in March 2024.

Several of the NBFCs are now looking to diversify their funding sources. Private credit, overseas borrowings or capital market instruments are a few options that these NBFCs are tapping now, after the direct bank credit channel became tougher.

However, sources said India’s financial services sector is currently under no stress. “RBI's actions are purely pre-emptive in nature, so as to ensure that no crisis-like situation erupts,” the economist noted.