RBI removes restrictions on Sachin Bansal's Navi Finserv

RBI removes restrictions on Sachin Bansal's Navi Finserv

The Reserve Bank of India removed restrictions on Sachin Bansal's Navi Finserv Ltd on December 2, less than two months after imposing them.

Such a quick turnaround is quite unusual with restrictions on large banks such as HDFC Bank lasting more than 13 months and Kotak Mahindra Bank (still ongoing) have lasted more than seven months.

"RBI had several rounds of interaction with the company to rectify deficiencies. Now, having satisfied itself based on the company’s submissions, and because of the adoption of revamped processes, systems, and the company’s commitment to ensure adherence to the regulatory guidelines on an ongoing basis, especially for ensuring fairness in the loan pricing, the Reserve Bank has decided to lift the afore-mentioned restrictions placed on Navi Finserv Limited, with immediate effect," said RBI in a statement.

This is a big boost for Sachin Bansal, who holds more than 98 percent of the company's shares, and made his fortune on the sale of his e-commerce firm Flipkart in 2018. Bansal had said that he wanted to build the next HDFC Bank. While Navi had applied for a universal banking licence, RBI rejected the application.

The regulator issued a directive to Navi and three more non-bank finance companies (NBFC) to stop lending from October 21, citing usurious lending practices which include high interest rates, unfair and hidden charges, and evergreening of loans.

"The preliminary discussions on the possible restrictions started around six months back. The rectification work was already underway," said a source aware of the matter told Moneycontrol.

While the ban was a result of unmet promises, the eagerness and the immediate action on the ground is what separated Navi from others on whom RBI has placed restrictions, said a second source, who did not wish to identify as the person was not authorised to speak with the media.

"More than anything, RBI looks at the company's willingness to comply and how soon they can do so. While Navi had made promises earlier it did not translate into concrete action on the ground. The ban shook the company and it some made quick changes, which helped RBI to lift the ban," said the second source quoted above.

At the time of placing restrictions, RBI had said that remedial actions would see the restrictions lifted immediately.

Behind the ban

RBI ombudsman received several complaints of high interest rates, penal charges, and lack of clarity on how compounding interest works, which have resulted in multiple borrowers ending up paying around 60 percent annual interest on their loans.

Offsite data analysis includes collecting information on loan terms and whether the customers were given loans over and above their capacity to pay, apart from multiple loans on top of existing loans, putting them in a debt trap.

In fact, in the RBI note on restrictions, the regulator had said that while the management was earnest, the tall targets meant that the sales teams pushed customers with more loans than they could afford to repay. The lifting of the ban probably reflects Navi reining in its salespeople and possibly reducing targets.

While availing the digital loans is extremely easy with a few clicks on the phone, most customers don’t understand the risks or interest these companies charge, especially when the customer defaults on even a single payment.

The central bank has been asking all financial institutions to reduce their exposure to unsecured lending, where it perceives overheating and also consumer indebtedness. This has also been borne out in multiple credit bureau reports, where small ticket loans below Rs 75,000 saw non-performing assets growing over the last four to six quarters.

On December 2, credit rating agency CRISIL said that it expects NBFC asset growth to moderate to 15-17 percent over the next two fiscals from the 23 percent growth the sector reported in the last fiscal.