With effect from October 21, 2024, the Reserve Bank of India (RBI) sought action against four non-banking financial institutions (NBFCs) on Thursday, prohibiting them from imposing fresh loan sanctions and disbursements. According to Morgan Stanley research, more lending firms may be subject to such examination in the days ahead.

Asirvad Microfinance, Arohan Financial Services, DMI Finance, and Navi Finserv were all named by the RBI in its order yesterday for violating the Fair Practices Code and failing to accurately evaluate borrowers' income and repayment capabilities prior to loan disbursement, particularly with regard to their microfinance loans.

These businesses also used questionable asset categories and failed to disclose interest rates and fees, which resulted in concerning activities including loan evergreening and more. Additionally, the RBI discovered that these NBFCs' weighted average lending rate (WALR) and interest spread over their cost of capital exceeded the established standards.

The apex had already warned the NBFC industry earlier this month not to pursue rapid loan book development at the expense of rules and equitable procedures. According to the bank, it would be best if NBFCs changed their own practices and stopped rewarding their staff with incentives and set goals for loan approval.

Regarding these four NBFCs, the RBI identified serious operational departures from the Income Recognition and Asset Classification (IR&AC) standards as well as egregious mishandling of their gold loan portfolios.

These NBFCs had also outsourced a number of their essential financial services, as the RBI pointed out.The limitations on these 4NBFCs will take effect on October 21, 2024, at the latest. However, this won't have an impact on the firms' current, ongoing loans. Additionally, debt recovery and collection procedures will continue in accordance with current policies.

In a recent research, Morgan Stanley, however, questioned this action, questioning if the RBI was concerned about specific NBFCs due to lending rates alone or if there were other factors at work.

"Based on an observation of lending rate data collated and presented by MFIN (the industry body for microfinance lenders), we note that Asirvad Microfinance's lending rates are not very different from other lenders," the report added.

Although the study notes that more regulatory action may be taken in the industry, the goal was not to completely ban new lending by NBFCs and microfinance institutions. Until these NBFCs demonstrate that their operations are completely in compliance with regulatory standards, the RBI's limitations will remain in effect.

Navi Finserv Limited has responded by stating that it is dedicated to operating its business in a way that upholds the greatest standards of transparency, customer service, and compliance. "The company is reviewing the directions received from the Hon’ble Reserve Bank of India and will work with them and address all the concerns raised with promptness and completeness," the statement continued.