(Bloomberg) -- India is stepping up its crackdown on lenders with errant practices as regulators move to curtail risks in the shadow banking sector.
The Reserve Bank of India ordered four shadow banks to stop sanctioning new loans because of high interest rate charges to customers. The entities include DMI Finance, backed by Japanese lender Mitsubishi UFJ Financial Group Inc., and Navi Finserv Ltd., backed by Sachin Bansal, co-founder of Walmart-owned e-commerce company Flipkart Private Ltd.
The ban comes a week after Shaktikanta Das, governor of the Reserve Bank of India, warned shadow lenders against a “growth at any cost” approach without “sustainable business practices and risk management frameworks.” Das warned that regulators would step in to take action if they don’t have robust risk-mitigating systems.
On top of usurious pricing, the four shadow lenders violated rules for microfinance loans relating to assessment of household income and the borrowers’ ability to honor monthly repayments, the RBI circular said on Thursday. They have to stop disbursing loans after Oct. 21, according to the circular.
The other shadow lenders penalized include Arohan Financial Services Ltd., backed by microfinance company Aavishkar Group, and Asirvad Micro Finance Ltd., a subsidiary of Manappuram Finance Ltd.
Shares of Manappuram Finance fell by as much as 18%, the most since March 2020, while at least three brokerages downgraded the stock, after the RBI’s move. The lender said the matter has been brought to the notice of its board and a meeting has been convened urgently to take immediate action.
DMI Finance, Navi Finserv and Arohan Financial Services haven’t commented on the RBI action.
DMI Finance recently said it is raising fresh funds from MUFG at a valuation of about $3 billion as it seeks to ramp up lending. The Japanese megabank will invest about $330 million, making it DMI’s second-largest shareholder after the deal.
The rapid growth of shadow banks, or non-banking finance companies as they are called in India, in the last few years has boosted credit flows and helped financial inclusion. But, there are some concerns building up.
In its circular, the regulator said it observed violations which have led, among others, to repeat lending to pay back earlier loans. Breaches were also found in the gold loan portfolio, disclosures on interest rates and fees, and outsourcing of core financial services.
The practices flagged by the central bank could put other non-bank lenders and microfinance institutions on watch, IIFL Securities Ltd. said in a note on Friday.
Compliance by the lenders may moderate near term growth, analyst Viral Shah wrote in the note. Profitability may be cut and investors could turn wary of some segments of lenders at risk of regulatory action, Shah said.
Indian Nonbanks Feel the Heat as RBI Cracks Down: Credit React
RBI has notably stepped up its vigilance this year after warning financial services firms to review their compliance processes to prevent a build up of risks.
The latest actions follow bans on JM Financial Ltd and IIFL Financial Ltd. JM Financial was barred from extending loans against shares and bonds. IIFL Finance was ordered to stop sanctioning gold loans.
The RBI said in the Thursday circular that it had stressed on the need for regulated entities to ensure fair, reasonable and transparent pricing, especially for small value loans. “However, unfair and usurious practices continued to be seen during the course of onsite examinations as well as from the data collected and analyzed offsite,” it said.
There will be a review by the RBI after the lenders take action to follow rules on pricing, risk management, customer service and grievance redressal, the circular said.
--With assistance from Hemal Savai and Chiranjivi Chakraborty.
(Updates throughout with details)
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