MC Explains: What is RBI order on Bajaj Finance, what does it mean for NBFC

BAJAJ FINANCE

On November 15, the Reserve Bank of India (RBI) asked Bajaj Finance to stop sanction and disbursal of loans under its two lending products with immediate effect. These two lending products are eCOM and Insta EMI Card, according to a press release from the central bank issued on Wednesday evening.

Soon after this, the company issued a statement saying Bajaj Finance re-affirms its commitment to rectify observations of the RBI in the Key Fact Statement and comply with RBI’s directions at the earliest. Here is an explainer on what it all means.

Why did RBI bar Bajaj Finance' two lending products?

The RBI said in the November 15 release that Bajaj Finance has not complied with the existing provisions of the Digital Lending guidelines of the RBI, by not issuing Key Fact Statements to borrowers under these two lending products.

Also, there were some deficiencies (or discrepancy) in the Key Fact Statements issued in respect of other digital loans sanctioned by the company.

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What do RBI regulations say on Key Fact Statements?

The Key Fact Statement is a statement that includes loan-related information such as annualised percentage rate, recovery mechanisms, details of the grievance redressal officer, the cooling-off period, insurance charges, disbursed amount, amount to be paid by the borrowers and number of instalments, among others.

The central bank’s regulations on digital lending make it mandatory for these lenders to provide a Key Fact Statement to their borrowers.

What was Bajaj Finance's response on this?

The company said the Key Fact Statement is in fact being issued for the loans booked under the two lending products mentioned above.

“However, based on the supervisory concerns raised by the RBI, we will undertake a detailed review of the KFS and implement requisite corrective actions to the satisfaction of the RBI at the earliest,” Bajaj Finance added.

Further the company said it will temporarily suspend sanction and disbursal of new loans under ‘eCOM; and ‘Insta EMI Card’.

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When did RBI issue digital lending guidelines?

Last year, the central bank had issued Digital Lending guidelines and extended the scope of application to all commercial banks, Primary (Urban) Co-operative Banks, State Co-operative Banks, District Central Co-operative Banks and Non-Banking Financial Companies (including Housing Finance Companies).

The instructions contained in the circular is applicable to ‘existing customers availing fresh loans’ and to ‘new customers getting onboarded’, RBI said.

Regulated Entities were given time till November 30, 2022, to put in place adequate systems and processes to ensure that ‘existing digital loans’ (sanctioned as on the date of the circular) were also in compliance with these guidelines in both letter and spirit.

What are these two specific lending products?

Insta EMI Cards allows Bajaj Finance customers to shop for products at no cost EMIs. As per company’s website, customers get a preapproved loan limit of up to Rs two lakh that customers can use at 1.5 lakh online and offline partner stores across 4,000 cities.

The CLSA report said the company issues nearly seven lakh digital EMI cards quarterly. “We think the total EMI cards issued would be higher, though,” the report added.

Whereas, on eCOM, the CLSA report said they assume it to be a ban on Bajaj Mall loans as well as other digital loans given on ecommerce sites.

What did experts say on the RBI action?

CLSA in its research report said the non-issuances of Key Fact Statement does not seem to be a major violation.

“There will be no material financial impact on the company on account of this action,” said Kranthi Bathini, Director of Equity Strategy at WealthMills Securities Pvt. Ltd.