RBI cracks down on shadow banks over high-interest loans, rule violations

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 mitgating systems.

In addition to 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 October 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 per cent, 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.

For DMI Finance, it recently said it’s raising fresh funding from MUFG at a valuation of about $3 billion as it sought to ramp up lending. The Japanese megabank will invest about $330 million in the firm to make it DMI’s second-largest shareholder after the deal.

Shadow banks, or non-banking finance companies as they are called, in India have grown in the last few years boosting credit flows and aiding financial inclusion. There are however some concerns that are building up.

In its circular, the RBI said it had in the past stressed to regulated entities on the need 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 analysed offsite,” it said.

The regulator also observed violations which have led, among others, to repeat lending to pay back earlier loans. Breaches were also found in the gold loan portfolio, disclosure requirements on interest rates and fees, and outsourcing of core financial services.

RBI will review these business restrictions after the lenders take remedial action to follow rules on pricing policy, risk management, customer service and grievance redressal, the circular said.