RBI Imposed Ban on 3 NBFCs to Disburse Loans

The Reserve Bank of India (RBI) has prohibited four non-banking finance companies (NBFCs), including two microfinance institutions (MFIs), from sanctioning and disbursing loans due to their practice of charging excessively high interest rates.

The affected entities are Asirvad Microfinance, Arohan Financial Services (also an MFI), DMI Finance—which provides personal, consumption, and loans for micro, small, and medium enterprises—and Navi Finserv, co-founded by Sachin Bansal, which offers home and personal loans.

Reasons for Ban

• Excessive interest rates and spreads
• Non-compliance with household income assessment and repayment obligation guidelines for microfinance loans
• Violations of income recognition and asset classification norms
• Non-compliance in the conduct of gold loans

This ban will take effect on October 21, allowing for the completion of ongoing transactions, as stated by the regulator.

In the monetary policy statement on October 8, RBI Governor Shaktikanta Das warned NBFCs and MFIs against prioritizing excessive equity returns. He raised concerns over high interest rates, processing fees, and unreasonable penalties.

The RBI cited “material supervisory concerns” regarding these companies’ pricing policies, specifically their weighted average lending rate (WALR) and the interest spread over their cost of funds, which were deemed excessive and not compliant with regulations.

Despite ongoing communication from the RBI encouraging responsible use of regulatory freedoms and fair pricing—particularly for small loans—unfair practices persisted during onsite examinations and through data analysis.

Additionally, the RBI found these NBFCs non-compliant with regulatory guidelines on assessing household income and evaluating borrowers’ monthly repayment capacities. There were also deviations in income recognition and asset classification norms, which led to issues such as loan evergreening and improper handling of gold loan portfolios.

The RBI clarified that while these NBFCs cannot sanction new loans, they may continue servicing existing customers and managing collections. The restrictions will be reassessed once the companies demonstrate compliance with pricing policies, risk management, customer service, and grievance redressal guidelines.

In February, RBI Deputy Governor M Rajeshwar Rao criticized MFIs for imposing high rates and unjustifiably increasing margins. Following regulatory warnings, MFI self-regulatory organizations (SROs) initiated corrective measures. Earlier this month, the Microfinance Industry Network announced a review of compliance with norms limiting the number of lenders per borrower to four and capping total microfinance debt at ₹2 lakh. Another SRO, Sa-Dhan, advised MFIs against lending to households already indebted to the microfinance sector beyond ₹2 lakh to prevent over-leveraging.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.