The Reserve Bank of India (RBI) has enacted stringent regulatory measures against four Non-Banking Financial Companies (NBFCs), effectively halting their loan sanctioning and disbursal operations as of October 21, 2024. This action targets Asirvad Micro Finance Limited, Arohan Financial Services Limited, DMI Finance Private Limited, and Navi Finserv Limited, in accordance with Section 45L(1)(b) of the Reserve Bank of India Act, 1934.

The RBI’s directive is prompted by serious concerns regarding these companies’ loan pricing strategies and other regulatory infractions, raising questions about the potential impact on customers. The central bank identified several issues related to the pricing policies of the NBFCs, particularly their Weighted Average Lending Rate (WALR) and interest spread over the cost of funds.

The RBI noted that these institutions were imposing excessive interest rates beyond regulatory limits, constituting a breach of its Master Directions for Microfinance Loans, updated in July 2022, as well as the Non-Banking Financial Company–Scale Based Regulation guidelines, revised in March 2024. Furthermore, these companies inadequately assessed the household incomes of borrowers or considered their current or future repayment capacities, resulting in the approval of microfinance loans without thorough evaluations. This raises concerns about the financial well-being of borrowers and the long-term viability of the lending institutions.

For the affected NBFCs—Asirvad Micro Finance, Arohan Financial Services, DMI Finance, and Navi Finserv—the RBI’s decision represents a significant setback. They must now concentrate on achieving compliance by reassessing their pricing structures and ensuring that all loans are approved based on proper evaluations of household income and repayment capability. Until these corrective actions are taken and reviewed, the firms will be prohibited from resuming loan disbursals.

Importantly, the restrictions do not impede these companies from servicing existing customers. They may continue with loan collection and recovery processes, as long as they adhere to current regulatory standards. The RBI has indicated that it will lift these restrictions once the NBFCs demonstrate compliance, particularly regarding risk management, customer service, and equitable pricing policies.

For existing borrowers, the immediate impact appears minimal; they can maintain their repayment schedules without disruption, and current loans will remain unaffected. However, the suspension of new loan disbursals could pose challenges for prospective borrowers who rely on microfinance loans from these institutions.