Reserve Bank of India (RBI) Governor Shaktikanta Das believes that both the banking and Non-Banking Financial Company (NBFC) sectors remain robust, with regulatory and financial parameters remaining strong. However, in an exclusive interaction with CNBC-TV18, he said the central bank has tightened supervision over certain NBFCs and microfinance institutions (MFIs) to protect the interests of customers and maintain the health of the sector.

The RBI has recently taken a firm stand by halting loan disbursement activities of the four NBFCs: Asirvad Micro Finance Limited, Arohan Financial Services Limited, DMI Finance Private Limited and Navi Finserv Limited.

With effect from October 21, 2024, the action was taken under section 45L(1)(b) of the RBI Act, 1934.

This move, according to the RBI governor, comes after extensive engagement with these institutions, which have failed to implement the necessary corrective measures.

“We act when we see that adequate corrective action is not being taken; we engage first,” Das said in an exclusive conversation with CNBC-TV18.

While the overall NBFC sector is robust, Das has also previously raised concerns about a few companies aggressively prioritizing rapid growth over sustainable business practices and risk management.

In the latest Monetary Policy Committee (MPC) review on 9 October, Das cautioned NBFCs against reckless expansion.

“Self-correction is the desired outcome of this message,” he said, adding that some NBFCs, driven by high profitability targets, are pushing for growth that could lead to risky lending practices.

Governor Das highlighted the danger of NBFCs and MFIs adopting “growth at any cost” approaches, which often lead to high interest rates and increased debt burden on borrowers.

He further criticized some NBFCs for charging interest rates that “border on usury”, posing serious risks to financially vulnerable borrowers.

A recent report by Morgan Stanley suggests that further regulatory measures could impact other lending companies if similar trends persist. The report notes a sharp rise in credit costs at Asirvad and other NBFCs, which, if left unchecked, could affect the stability of the sector.

However, Morgan Stanley clarified that RBI’s intentions are not to stifle lending growth in the NBFC and MFI space, but rather to ensure responsible lending practices across the industry.

The RBI has also stated that fostering a culture of compliance within NBFCs is essential to maintain financial stability.