The Reserve Bank of India (RBI) has taken a significant step by barring four non-banking financial companies (NBFCs) from sanctioning and disbursing loans starting October 21. The companies affected include Asirvad Micro Finance, Navi Finserv, Arohan Financial Services, and DMI Finance. This action comes in light of serious supervisory concerns related to high lending rates and non-compliance with regulatory standards.

In a press release, the RBI emphasized its ongoing commitment to ensuring fair, reasonable, and transparent pricing, particularly for small-value loans. The central bank noted that despite its efforts to educate lenders on responsible regulatory practices, instances of "unfair and usurious practices" continued to surface during onsite examinations and data analyses.

The RBI's findings revealed that these NBFCs charged excessively high weighted average lending rates and interest spreads over their cost of funds, violating the provisions of the fair practices code established by the bank. Additionally, the NBFCs were found to have deviated from guidelines on assessing household income and accounting for existing repayment obligations when issuing microfinance loans. Other discrepancies included improper income recognition, asset classification norms, and issues related to mandated disclosures on interest rates and fees.

In response to the RBI's actions, a spokesperson for Navi Finserv stated that the company is currently reviewing the circular and is committed to addressing all regulatory concerns. The spokesperson reaffirmed the company's dedication to compliance, transparency, and customer care.

While these restrictions will take effect at the close of business on October 21, the affected companies will still be able to serve their existing customers and conduct collection and recovery operations.

This move aligns with RBI Governor Shaktikanta Das's recent warnings regarding the NBFC sector's growth, urging caution against imprudent practices and usurious interest rates. The RBI continues to monitor the sector closely and has indicated that it will not hesitate to take further action if necessary. In a related note, the central bank recently lifted restrictions on IIFL Finance's gold loan business after addressing serious operational lapses.