Why did the RBI ban Sachin Bansal's Navi from sanctioning new loans?

The Reserve Bank of India (RBI) has banned Flipkart co-founder Sachin Bansal-led Navi Finserv from loan sanctioning and disbursement processes, effective October 21, 2024.

Navi is not the only entity affected. The RBI has taken similar action against three other non-banking financial companies (NBFCs): DMI Finance, Asirvad Micro Finance, and Arohan Financial Services.

The RBI's directive, issued under Section 45L(1)(b) of the Reserve Bank of India Act, 1934, took effect from the close of business on October 21, 2024.

Why did the RBI take this stringent action?

The strict action came after RBI thoroughly investigated NBFC's loan pricing practices and other regulatory concerns. According to the RBI, the primary reason for this move was the discovery of material supervisory concerns regarding the companies’ Pricing Policies.

Specifically, their Weighted Average Lending Rates (WALR) and the interest spreads charged were found to be excessive and not in line with the regulations.

The RBI also pointed out that these NBFCs failed to comply with the Master Direction on Microfinance Loans (2022) and Scale Based Regulation (2023), which govern how microfinance loans should be priced and managed. These firms were also found to be not in conformity with the provisions laid down under the Fair Practices Code issued by the Reserve Bank.

In addition to usurious pricing, these NBFCs were found to be non-adherence with the regulatory guidelines on assessing household income and considering existing/proposed monthly repayment obligations in respect of their microfinance loans.

RBI also observed deviations in respect of Income Recognition & Asset Classification (IR&AC) norms resulting in evergreening of loans, conduct of gold loan portfolio, mandated disclosure requirements on interest rates and fees, outsourcing of core financial services, etc.

Impact on affected NBFCs

The directive comes at a critical time for the affected companies. For instance, Asirvad Micro Finance is preparing for an initial public offering (IPO) worth Rs 1,500 crore. Arohan Financial Services' Managing Director, Manoj Nambiar, was recently appointed chairperson of the Microfinance Industry Network.

Meanwhile, Navi Finserv is still recovering from the RBI's rejection of its application for a universal banking license two years ago.

DMI Finance, which is backed by Japan’s MUFG Bank, had seen significant investment growth, with MUFG’s stake in the company reaching Rs 4,712 crore by August 2024.

Responses from the NBFCs

In response to the RBI’s actions, Navi Finserv released a statement expressing its commitment to addressing the regulator’s concerns.

"Navi Finserv is currently reviewing the circular received from the RBI and is committed to addressing all concerns raised by the regulator promptly and effectively, prioritising what’s right for our customers. The company remains dedicated to maintaining the highest standards of compliance, transparency, and customer care in its operations," a spokesperson said.

Similarly, Asirvad Micro Finance acknowledged the RBI's feedback, stating that the company is preparing to take corrective actions to align with regulatory guidelines.

"The Board has reiterated its unwavering commitment to implement RBI’s direction in letter and spirit," Asirvad Micro Finance noted in a statement. The firm also highlighted plans for a detailed governance and risk management review.

RBI's stance on compliance

The RBI has clarified that the restrictions apply only to sanction new loans. Notably, these NBFCs can continue servicing existing customers and manage loan collections under the extant regulatory guidelines.

These restrictions will remain in place until the affected companies provide evidence of their compliance with RBI regulations, particularly around their pricing policies, risk management, and customer service standards.

Over the past several months, the central bank has urged lenders to adopt fair and transparent pricing models, especially for small-value loans, while warning against practices that could destabilize the sector’s financial integrity.