The Reserve Bank of India's ban on Sachin Bansal-backed Navi Finserv and three more Non-Banking Financial Companies (NBFCs) from issuing loans has stirred significant concern in the fintech industry.
Triggered by excessive interest rates charged by some non-ban lenders and their non-compliance with regulatory norms, the RBI action spotlights critical issues surrounding unsustainable growth strategies of the NBFCs. The central bank identified failures to adhere to the Fair Practices Code, improper income assessments, and neglect of borrowers' repayment capacities, particularly in the microfinance sector. Inspections revealed alarming practices, including evergreening of loans, questionable asset classification, and inadequate disclosures. All these were further compounded by outsourcing of core financial services.
In light of the October 9 monetary policy committee announcement, the RBI had issued a stern warning to NBFCs about the dangers of aggressive expansion at the expense of risk management guidelines and long-term viability.
The industry is divided on the issue, with some leaders expressing support for the RBI's regulatory actions as necessary for sustainability, while others argue that the crackdown could stifle innovation and access to credit in underserved markets.
Also read: Follow ‘compliance first’ culture: RBI governor Shaktikanta Das sends out a stern message to NBFCs
'Growth at any cost' mindset
While most NBFCs operate within acceptable limits, a few outliers have been rushing for rapid growth without robust risk frameworks, experts weigh in.
"This growth-at-any-cost mentality is alarming and unsustainable," said the founder of a leading microfinance NBFC, who requested anonymity. "Yes, there's pressure to show returns, but aggressive expansion without adequate risk management is setting us up for long-term failure."
Sanjay Swamy, vice-president of Prime Ventures, stressed on the need for compliance. "Crib all you want about the actions of the regulator, but bluntly put, you simply cannot choose to interpret regulations to your convenience. If you are committed to 100 percent compliance, you have nothing to worry about. It's not easy to build a fintech business. There are no get-rich-quick schemes, but there are huge problems to solve, and if one takes the long-term view, there will always be meaningful and large companies to be built," he said in a social media post.
Another founder of a prominent housing finance company echoed this sentiment. "NBFCs grown exponentially in recent years, but the pressure to maintain double-digit growth has made some players cut the corners. It’s not just about high interest rates—it’s about sustainability. A rethink in approach is needed."
The founder of a P2P lending firm sounded worried over the central bank action. "The RBI's business restriction on DMI and Navi is a call for all consumer lending fintechs, NBFCs and banks to stop high/usurious pricing, and second, stop indiscriminate lending with high default rate because you are able to charge high interest rates," he said.
"The RBI also feels that these loans, often without any end-use monitoring, are making their way to the stock market. With this circular, the whole lending industry will go on high alert and slow down drastically. It will be difficult for a lot of fintechs and NBFCs to survive going forward."
His comments reflect a broader anxiety about the impact of the RBI action on the fintech landscape. Other founders operating in the same space are worried about the implications of the crackdown on partnerships.
RBI crackdown on few NBFC-MFI over usurious pricing not industry wide issue: MFIN CEO Alok Misra
"The RBI crackdown citing usurious interest rates is very strong. Now, banks will think twice before partnering with fintechs for a co-lending arrangement. This could have serious impact if the review doesn't come out in favour of Navi and others," said another founder.
Pressure of equity
Experts are increasingly pointing to investor pressure as a driving factor behind adopting unsustainable practices. "Some NBFCs, including MFIs and HFCs, have been found to pursue excessive returns on equity due to substantial capital inflows from domestic and international investors. This pursuit often leads to the imposition of exorbitant interest rates, high processing fees, and frivolous penalties on borrowers. Such practices, driven by investor pressure, are unsustainable and unethical," business advisory firm MGB said.
The RBI has made it clear that a "self-correction" within the sector is necessary to avoid a potential crisis. Experts emphasise the need for NBFCs to review their target-based compensation structures, which can incentivise reckless growth.
However, the response to the RBI's actions has not been uniform across the industry.
Abhishek Kumar, a VC at Uleash Capital, pointed out "loads of misplaced anger from the fintech/startup community" against the RBI. "A lot of players in the ecosystem are reading this as some sort of selective rage against fintechs, which it is not. The RBI has initiated action against players that have not sorted their house despite repeated warnings."
The RBI’s directive is expected to lead to a cautious pullback among NBFC-fintechs. "This will likely spook a few NBFCs that have been on aggressive expansion trajectories," said the founder of a mid-sized NBFC. "I expect some players to slow down on lending, especially in high-risk, unsecured segments."
Some founders are concerned that such actions could unintentionally limit the access to credit for underserved segments. "The risk of pulling back too hard is that it will leave borrowers in Tier 2 and Tier 3 cities, who depend on NBFCs, vulnerable to informal moneylenders," the founder of a microlender said. "The challenge is to find a balance between sustainable growth and financial inclusion."
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