India regulator cracks down on shadow banks to cut risks
Breaches by these lenders include disclosures on interest rates and fees, and outsourcing of core financial services
INDIA has increased its crackdown on lenders with errant practices, as regulators move to curtail risks in the shadow banking sector.
The Reserve Bank of India (RBI) has ordered four shadow banks to stop sanctioning new loans because of their high interest rate charges to customers.
DMI Finance, backed by Japanese lender Mitsubishi UFJ Financial Group (MUFG), was one of the entities that received the regulator’s instruction. Another was Navi Finserv, which is backed by Sachin Bansal – co-founder of Walmart-owned e-commerce company Flipkart.
The ban comes a week after RBI governor Shaktikanta Das warned shadow lenders against a “growth at any cost” approach without “sustainable business practices and risk management frameworks”.
The governor said that regulators would step in to take action if they do not have strong systems to manage risk.
The four shadow lenders also violated rules for microfinance loans relating to assessment of household income and the borrowers’ ability to honour monthly repayments, the central bank’s circular said on Thursday (Oct 17). They must stop disbursing loans after Oct 21, it indicated.
The other shadow lenders that were penalised include Arohan Financial Services, backed by microfinance company Aavishkar Group, as well as Asirvad Micro Finance, a subsidiary of Manappuram Finance.
Shares of Manappuram Finance fell by as much as 18 per cent – the most since March 2020. After the Indian central bank’s move, at least three brokerages downgraded the stock.
Manappuram Finance said the matter has been brought to the notice of its board and a meeting has been convened urgently to take immediate action.
Navi Finserv, DMI Finance and Arohan Financial Services did not comment on RBI’s move.
DMI Finance recently said that it is raising fresh funds from MUFG at a valuation of about US$3 billion as it seeks to ramp up lending. The Japanese mega-bank will invest about US$330 million, making it the lender’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. However, concerns about these lenders have been building.
The regulator also said that 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 said on Friday.
Compliance by the lenders may moderate near-term growth, IIFL Securities analyst Viral Shah noted. Profitability may be cut and investors could turn wary of some segments of lenders at risk of regulatory action, he added.
RBI has notably stepped up its vigilance this year, after urging financial services companies to review their compliance processes to prevent a build-up of risks.
The latest actions follow bans on JM Financial and IIFL Financial. JM Financial was barred from extending loans against shares and bonds, while IIFL Finance was ordered to stop sanctioning gold loans.
The RBI said on Thursday 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 on-site examinations as well as from the data collected and analysed off-site,” it added.
The regulator added that it will conduct a review, after the lenders take action to follow rules on pricing, risk management, customer service and grievance redressal. BLOOMBERG
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