How Sachin Bansal's Navi Finserv reversed RBI lending ban in quick time

How Navi reversed RBI ban in quick time

Sachin Bansal-led Navi Finserv took immediate action to reduce the interest rate on lending by almost 10 percentage points within 10 days after the Reserve Bank of India’s restriction on lending in October, helping the company reverse the ban in less than 45 days.

It is quite unusual for RBI to reverse a supervisory restriction in a short time after the restriction on the company was placed on October 18, stopping the company from lending since October 21.

On October 29, the Navi Finserv board decided to reduce the interest rate to 26 percent from November 8.

“The company has reduced the maximum interest rate for personal loans to 26 percent effective November 8 from 35 percent previously. This is in line with the commitments made by the company to the RBI,” said a source close to the development.

This helped the company come out of the regulator’s ban on December 2, less than 45 days after placing the restrictions.

One of the key reasons why RBI asked Navi Finserv to stop lending was the high effective interest rate of around 45 percent. Usually, such high interest rates are charged by credit card issuers, who give customers around 45 days of interest-free period.

Under the old mechanism prior to the ban, sources say Navi charged a flat interest rate inclusive of processing fees and other charges. This is called Annual Percentage Rate (APR), which is what RBI looks at rather than the interest rates that the companies advertise to the customers.

"This resulted in their pricing touching the top end of the spectrum anywhere between 36 percent and 45 percent," the source said. After the ban, the lender has reworked the pricing mechanism. Under the new pricing policy, Navi has decided to charge an interest rate and separately charge for documentation and processing fees. It is anticipated that by doing so, the cost of loans would sharply reduce, apart from bringing transparency.

According to another source close to the development, while the RBI note on October 18 mentioned the evergreening of loans by non-banking financial companies, Navi did not do so for its customers.

“The company has put in place mechanisms to reject customers displaying the tendencies of overleveraging or evergreening - this principle has served well for the company in maintaining asset quality,” the person quoted above added.

Regulator’s unsecured lending concerns

While Navi was focussed on the Rs 50,000 to Rs 1,00,000, the recent developments and run-in with the regulator are expected to force the company to reduce its exposure to loans below Rs 50,000 even further.

According to the RBI, most of the stress is in this segment and cautioned financial institutions to reduce their lending to this segment multiple times over the last year.

“Loans below Rs.50,000 have a small share in the company’s overall assets under management (AUM). It will continue to evaluate each loan based on its merits and the creditworthiness of the customers. There will not be any blanket restrictions on distributing loans to any segment,” said a person aware of Navi’s plans.

Improving asset quality in FY 25

The person added that even before the RBI’s restrictions Navi had started to recalibrate its exposure to some of the segments in the current financial year following a rise in non-performing assets during FY 24.

Navi reported an NPA upwards of 5 percent during FY 24, compared with 2.8 percent during FY 23. This has resulted in the company making an impairment provision of Rs 490 crore toward its loan assets.

“Navi’s asset quality has improved over the past few quarters, supported by strengthened underwriting and increased collection. While some of the improvement in asset quality metrics is a factor of steady growth in assets under management (AUM), the majority of the traction is accredited to better selection of borrowers through the underwriting models, stringent approval rates and tight monitoring and collections systems,” Crisil said in a note on October 2024.

To be sure, the 26 percent interest rate is the highest Navi will charge customers and those with good credit scores will likely get loans at much lower rates than that. Most lenders follow risk-based pricing wherein the interest charged is linked to the credit risk of the customer.

This could also mean that Navi’s NPA situation could improve further as it exits the high-risk, high-interest-rate customers. “With the recent revision in interest rates, the company expects better conversion of good quality customers given that the interest rates of the company are very attractive,” said the person quoted above who is aware of Navi’s thinking.