RBI crackdown on non-bank lenders, driven by 14% loan spread

Four non-bank microlenders recently targeted by the Reserve Bank had been charging excessively high rates to vulnerable borrowers in order to maintain a 14 percent loan spread. The Reserve Bank of India's (RBI) crackdown on October 17, 2024, targeted four major non-bank lenders: Asirvad Micro Finance Ltd, Arohan Financial Services Ltd, DMI Finance, and Sachin Bansal’s Navi Finserv.

The action was prompted by "material supervisory concerns" related to their lending practices. The central bank ordered these entities to immediately stop approving and disbursing new loans until further notice.

The primary concern raised by the RBI was related to the companies' pricing policies, particularly their weighted average lending rate (WALR) and the interest spread over the cost of funds. These microlenders were found to be charging significantly higher rates than allowed, especially to vulnerable segments of society.

The RBI stated that the loan spreads charged by these institutions were far above the regulatory limits, leading to concerns about fair pricing and the financial burden on borrowers.This move by the RBI is part of a broader effort to regulate non-banking financial companies (NBFCs), particularly those involved in microfinance, to ensure that lending practices remain fair and transparent. Non-compliance with the guidelines could lead to stricter penalties, including permanent suspension or other regulatory actions.