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February 22, 2024
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RBI Deputy Governor Warns NBFCs on P2P Lending Practices and High Microfinance Interest Rates

Last Updated: Feb 09, 2024

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The Reserve Bank of India (RBI) Deputy Governor M Rajeshwar Rao has cautioned Non-Banking Finance Companies (NBFCs) on peer-to-peer lending, saying the regulator has observed certain business practices that do not appear to be in line with its guidelines. He was speaking at the sixth edition of the NBFC Summit organised by the Confederation of Indian Industry in Mumbai today.

Mr Rao said, instead of educating the lenders about the inherent risks in the lending activity, NBFC-P2Ps have been observed to underplay the risks through various means such as promising high or assured returns, structuring the transactions, providing anytime fund recall facilities, among others. He added that any breach of licensing conditions and regulatory guidelines is non-acceptable.

Mr Rao said, there have been some reports that the regulations for NBFCs, especially for NBFCs in the Upper Layer, have been made at par with banks. Addressing this issue, he said, while it is agreed that the regulations between banks and NBFCs have been harmonised in some areas and regulations for certain NBFCs especially Upper Layer NBFCs have been strengthened under Scale Based Regulatory framework, however significant differences continue to exist between the regulations applicable to banks and NBFCs.

Meanwhile, he also highlighted the regulator’s disenchantment with the microfinance companies for charging high interest rates, stating that RBI is “not oblivious” to such practices.

Speaking about the deposit taking activity of NBFCs, the RBI deputy governor said, it was the non-acceptance of public deposits by the NBFCs, which provided the regulatory comfort to the Reserve Bank to have lower entry barriers for such players, allowing them to specialise in any specific sector of their choice and lower exit barriers to wind up their businesses.

Mr Rao added that acceptance of deposit, in whatever manner and form, necessitated a macro financial safety net, including deposit insurance and central bank liquidity backstop. He said, these safety nets come with increased regulatory rigour and intense supervisory oversight.

The RBI Deputy governor said the NBFC sector is an important stakeholder of the Indian financial sector. Strengthened regulation and enhanced oversight of the NBFC sector is the best testimony of the importance of the NBFCs in not only the financial system but overall economy. Mr Rao expressed hope that NBFCs will play a significant role in achieving the dream of a 5 trillion dollar economy going forward.

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