RBI action against Navi Finserv, 3 other NBFCs: What it means for customers

The Reserve Bank of India (RBI) has taken strict regulatory action against four Non-Banking Financial Companies (NBFCs), halting their loan sanctioning and disbursal activities starting from October 21, 2024.
The RBI said it has taken this step in accordance with Section 45L(1)(b) of the Reserve Bank of India Act, 1934, and targets NBFCs like Asirvad Micro Finance Limited, Arohan Financial Services Limited, DMI Finance Private Limited, and Navi Finserv Limited.
The directive comes in response to concerns over their loan pricing policies and other regulatory violations, sparking questions about the implications for customers.
The central bank flagged several issues in the pricing policies of these NBFCs, specifically related to their Weighted Average Lending Rate (WALR) and Interest Spread over the cost of funds.
According to the RBI, these institutions were charging excessive interest rates, going beyond the regulatory limits. This non-compliance was seen as a violation of the RBI’s Master Directions for Microfinance Loans, updated in July 2022, and the Non-Banking Financial Company–Scale Based Regulation guidelines, revised in March 2024.
“Over the last few months, the Reserve Bank has been sensitising its Regulated Entities through various channels on the need to use their regulatory freedom responsibly and 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,” RBI said.
Additionally, these companies failed to properly assess the household incomes of their borrowers or factor in their current or future repayment capacities. As a result, many microfinance loans were being sanctioned without adequate evaluation, risking both the financial health of borrowers and the long-term sustainability of the lending companies.
For Asirvad Micro Finance, Arohan Financial Services, DMI Finance, and Navi Finserv, the RBI’s move is a big setback. The NBFCs must now focus on compliance, reviewing their pricing structures, and ensuring that all loans are sanctioned in accordance with proper household income assessments and repayment ability evaluations. Until these corrective measures are implemented and reviewed, the companies won’t be allowed to resume loan disbursals.
However, it is important to note that this restriction doesn’t prevent these firms from servicing their existing customers. Loan collection and recovery processes are still allowed, provided they comply with the current regulatory framework. The RBI has assured that it will lift the restrictions once these companies demonstrate compliance with guidelines, particularly in areas such as risk management, customer service, and fair pricing policies.
For current borrowers of these NBFCs, the impact is minimal in the short term. Customers will still be able to continue their repayment schedules, and existing loans will not be affected. However, the halt in new loan disbursals could affect future borrowers, especially those reliant on microfinance loans from these institutions.
“These business restrictions have been made effective from the close of business on October 21, 2024 to facilitate closure of transactions in the pipeline, if any. These business restrictions do not preclude these companies from servicing their existing customers and carrying out collection and recovery processes in accordance with the extant regulatory guidelines,” RBI said.
For prospective customers or those looking to renew or take out fresh loans, there will be delays. Until the RBI deems these NBFCs compliant with regulations, no new loans will be sanctioned. This may push potential borrowers to seek financial assistance from other institutions, which could either offer loans at different rates or under stricter eligibility criteria.
The RBI’s action has already rippled through the financial market, prompting several brokerages to reassess their ratings on the affected NBFCs. Among the most notable reactions is the downgrade of Manappuram Finance, which holds a significant stake in Asirvad Micro Finance. Multiple brokerage houses have slashed their price targets and profitability estimates for the NBFC, citing the RBI’s embargo as a key concern for long-term profitability.
CLSA, for instance, maintained its “outperform” rating on Manappuram but revised its price target from Rs 240 to Rs 200, noting that Asirvad accounts for 25% of the company’s overall Assets Under Management (AUM).
Morgan Stanley took a more cautious approach, downgrading Manappuram from “Overweight” to “Equalweight” and reducing its price target to Rs 170. The firm cut consolidated earnings forecasts for Manappuram by 20% for FY2025, and a more drastic 30% for FY2026 and FY2027.
Similarly, Jefferies downgraded its rating on Manappuram to “hold” and slashed its price target to ₹167. Jefferies highlighted concerns that Manappuram might need to inject capital into Asirvad should defaults rise due to the regulatory restrictions.
In the wake of the RBI’s directive, the affected NBFCs have responded with statements of commitment to regulatory compliance.
A spokesperson for Navi Finserv said, “We are currently reviewing the circular from the RBI and are committed to addressing all concerns raised by the regulator promptly and effectively. Customer care and compliance remain our top priorities.”
Asirvad Microfinance echoed this sentiment, saying: “We value the feedback from the RBI and have convened an urgent board meeting to address the concerns raised. We are fully committed to implementing the RBI’s directions and ensuring compliance in a timely manner.”
While the RBI’s action has put immediate pressure on these NBFCs, the long-term impact will depend on how quickly and effectively they can align with regulatory guidelines.
“These business restrictions will be reviewed upon receipt of confirmation from the companies regarding suitable remedial action having been taken to adhere to the regulatory guidelines at all times, more particularly their pricing policy, risk management processes, customer service and grievance redressal aspects, to the satisfaction of the Reserve Bank,” the central bank said in its release.
For customers, the immediate fallout is a potential delay in accessing loans, but existing loans remain unaffected.