RBI Bars 4 NBFCs for Violating Loan Pricing Regulations
19-10-2024
06:59 AM
1 min read
What’s in today’s article?
- Why in News?
- What is Digital lending?
- Need to regulate digital lending
- Steps taken by to regulate digital lending
- RBI Bars Four NBFCs
Why in News?
The Reserve Bank of India (RBI) has prohibited four non-banking finance companies (NBFCs) from approving and disbursing loans.
These four NBFCs are: Asirvad Micro Finance Ltd (backed by Manappuram Finance), Arohan Financial Services Ltd, DMI Finance (supported by Mitsubishi), and Navi Finserv (founded by Flipkart co-founder Sachin Bansal).
This action was taken due to their violation of several regulations, including charging excessively high interest rates.
The issue highlights a broader concern, as numerous NBFCs and lending apps, both legal and illegal, are reportedly engaging in predatory loan pricing and harsh recovery practices.
What is Digital Lending?
- Digital lending is the process of availing credit online.
- It involves lending through web platforms or mobile apps, utilising technology in customer acquisition, credit assessment, loan approval, disbursement, recovery and associated customer service.
- Its increased popularity amongst new-age lenders can be attributed to expanding smartphone penetration, credit range flexibility and speedy online transactions.
- It includes products like Buy Now, Pay Later (BNPL), which is a financing option (or simply a short-term loan product).
- BNPL allows one to buy a product or avail a service without having to worry about paying for it immediately.
Need to regulate digital lending
- Illegal lending apps in India
- A report by the RBI, published in 2022, says that India has the maximum number of digital loan apps in the world.
- The report has marked 600 loan apps illegal and said that the central bank.
- Low-income and financial unsavvy Indians are the targets
- These apps mostly lend small sums between Rs 2,000 and Rs 10,000, targeting low-income and financial unsavvy Indians.
- These loans come with huge interest rates and extortionate terms and conditions, to which borrowers have no recourse.
- This increases the vulnerabilities of these borrowers by exploiting the unmet need for credit.
- Harassment by recovery agents
- These apps demand access to contact lists and use harassing techniques for repayment, including abusive calls, messages, and even morphed images used to extort borrowers.
- In extreme cases, victims have faced sexual harassment, with incidents leading to tragic consequences such as suicide.
- In 2021, at least six people committed suicide in Hyderabad alone due to harassment by agents.
- Breach of privacy
- With just one tap, borrowers allow these lenders to access everything on their phone. The lender also get access to information such as PAN and Aadhar details.
- The apps, on the pretext of advancing a loan, obtain all information from the customers' phones which could later be used by the company to perpetrate some other financial crime.
- Acts as a tool for money laundering
- More than a hundred apps related to loans, betting and dating successfully collected thousands of crores in revenue and repatriated them to China.
- This was revealed an investigation conducted by the Enforcement Directorate (ED).
Steps taken by to regulate digital lending
- Role of RBI strengthened to address the issue
- RBI has been designated as the nodal department for dealing with complaints against unauthorised digital lending platforms as well as mobile apps.
- In August 2022, RBI issued the first set of guidelines for digital lending in order to combat illegal activities by certain players.
- These guidelines aimed at protecting customers from unethical business practices, such as mis-selling, breach of data privacy, unfair business conduct and charging of exorbitant interest rates adopted by digital lenders.
- Multi-agency crackdown on illegal loan apps
- In September 2023, Union Finance Minister chaired a meeting with appropriate officials and launched a multi-agency crackdown on illegal loan apps.
- To curb the menace of illegal loan apps, the RBI has been asked to prepare a ‘whitelist’ of legal loan apps.
- At the same time, MEITY has been tasked with ensuring only such legal applications (list prepared by RBI) are available on app stores.
- In September 2023, Union Finance Minister chaired a meeting with appropriate officials and launched a multi-agency crackdown on illegal loan apps.
- Registration of payment aggregators
- The RBI has been entrusted to ensure that the registration of payment aggregators be completed within a time frame.
- A payment aggregator acts as a third party responsible for managing and processing merchants' online transactions.
- The RBI has also been entrusted with monitoring ‘mule or rented’ accounts that may be used for money laundering.
- RBI has further been asked to review and cancel dormant non-banking finance companies (NBFCs) to avoid their misuse by such app operators.
- The RBI has been entrusted to ensure that the registration of payment aggregators be completed within a time frame.
- Public Repository for Digital Lending Apps
- To curb illegal lending activities, the RBI has announced the creation of a public repository of digital lending apps (DLAs) deployed by regulated entities.
- This repository, available on the RBI’s website, will help borrowers verify whether a lending app is associated with a legitimate regulated entity, aiding in the identification of illegal apps.
RBI Bars Four NBFCs
- About the news
- The RBI has barred four non-banking finance companies (NBFCs) — Asirvad Micro Finance Ltd, Arohan Financial Services Ltd, DMI Finance, and Navi Finserv — from sanctioning and disbursing loans.
- The action was based on violations related to their pricing policies, including excessive interest charges that did not adhere to RBI regulations.
- While RBI has no upper limit on loan interest rates, it mandates transparency, which these NBFCs failed to comply with.
- Regulatory Warnings Ignored
- The RBI has consistently urged regulated entities to adopt fair, transparent, and reasonable pricing practices, especially for small loans.
- Despite these warnings, usurious practices continued to surface during onsite examinations and offsite data analysis. N
- BFCs were found violating regulations on income assessment for microfinance loans, failing to comply with Income Recognition & Asset Classification (IR&AC) norms, and violating disclosure requirements on interest rates and fees.
Q.1. Why did RBI bar four NBFCs from disbursing loans?
RBI barred four NBFCs, including Asirvad Micro Finance and Navi Finserv, for charging excessive interest rates that violated the central bank's pricing regulations. The RBI mandates transparency in pricing, which these NBFCs failed to comply with.
Q.2. What steps has the RBI taken to regulate digital lending?
The RBI has issued guidelines to regulate digital lending, emphasizing fair pricing, transparency, and customer protection. It has also created a public repository to help borrowers verify legal lending apps and avoid predatory platform.