On October 17, 2024, the Reserve Bank of India (RBI) issued a significant directive to Asirvad Micro Finance Limited (AMFL), a material subsidiary of Manappuram Finance Limited, to cease and desist from loan sanctions and disbursals effective from the close of business on October 21, 2024. This action comes after RBI’s supervisory concerns over the company’s pricing policy, particularly its Weighted Average Lending Rate (WALR) and the Interest Spread charged to borrowers, which were found to be excessive and not in compliance with the central bank’s regulations.

The directive is based on non-adherence to the provisions of the RBI’s Master Direction on Regulatory Framework for Microfinance Loans issued on March 14, 2022, and the Master Direction on Non-Banking Financial Company – Scale Based Regulation issued on October 19, 2023. RBI noted that Asirvad Micro Finance failed to conform to these rules, particularly in fair practices, customer service, and risk management processes, which are crucial for ensuring transparent and responsible lending practices.

The RBI’s action does not prevent AMFL from continuing its collection and recovery processes for existing loans, and they are permitted to service their current customers as per the ongoing guidelines. However, no new loans can be sanctioned or disbursed until further notice.

Regulatory Concerns

The RBI’s scrutiny primarily focused on the excessive interest rates charged by AMFL. The weighted average lending rate (WALR), which reflects the average cost of loans disbursed by the company, was found to be disproportionately high, raising concerns about unfair pricing in the microfinance sector. Furthermore, the interest spread—the difference between the cost of funds and the rate charged to borrowers—was also noted as being beyond acceptable levels, leading to regulatory intervention.

This is not the first instance where the RBI has taken action against microfinance institutions (MFIs) and non-banking financial companies (NBFCs) for such issues. Over the past few months, the RBI has been emphasizing the need for fair, transparent, and reasonable pricing, particularly for small value loans, which are a key segment for microfinance institutions. Despite these warnings, AMFL was found to be violating these principles, prompting this strict action from the central bank.

Implications for Asirvad Micro Finance and Manappuram Finance

This move is expected to have significant implications for Asirvad Micro Finance, which has been one of the key players in the Indian microfinance sector. While the RBI has not yet imposed financial penalties, the suspension of loan disbursals could affect the company’s business operations, especially in terms of growth and outreach to new borrowers. Manappuram Finance, being the parent company, may also face reputational risks as a result of these regulatory findings.

Asirvad’s management is currently studying the order and has stated that it is taking steps to address the concerns raised by the RBI. The company is expected to overhaul its pricing policy, risk management, and customer grievance redressal mechanisms to meet the regulatory standards laid down by the RBI.

The RBI’s decision will be reviewed once AMFL provides satisfactory evidence of corrective action. Until then, the company will focus on its existing loan portfolio without engaging in new disbursals.

Broader Impact on the Microfinance Sector

The RBI’s directive also reflects broader concerns about the microfinance sector in India, where interest rates and loan recovery practices have often been points of contention. The central bank has been tightening regulations to prevent usurious lending practices and ensure that microfinance institutions, which largely serve the economically weaker sections of society, maintain a fair and transparent approach to lending.

This action against Asirvad Micro Finance, along with similar directives issued to other companies like Arohan Financial Services, DMI Finance, and Navi Finserv Limited, shows that the RBI is stepping up its efforts to regulate the sector more strictly.

It also brings attention to the need for NBFCs and MFIs to adhere to fair practices, especially in the context of pricing policies. The RBI has been advocating for responsible lending, urging microfinance institutions to ensure that their interest rates are justifiable and do not burden borrowers unduly.

Ongoing Review and Potential for Remediation

The RBI’s business restrictions will be lifted once AMFL confirms that it has taken appropriate remedial actions. This includes realigning its pricing policy, enhancing customer service processes, and improving risk management strategies to align with regulatory guidelines. The Fair Practices Code laid down by the RBI must also be strictly adhered to in all lending activities.

As the microfinance industry faces increasing scrutiny, it is likely that more companies will come under the RBI’s watchful eye, particularly those involved in small-value loans and high-interest lending. It is imperative for companies like Asirvad to address these concerns swiftly to restore confidence in their operations and ensure continued growth.

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The RBI’s directive against Asirvad Micro Finance highlights the importance of maintaining fair lending practices in India’s rapidly evolving financial landscape. As the company works to resolve the issues raised, the broader impact on the microfinance sector will continue to unfold. Keep an eye on this space for updates on the evolving regulatory environment and its implications for financial institutions in India.