The Reserve Bank of India (RBI) is gearing up to tighten its oversight on shadow banks engaging in high-risk unsecured lending to sensitive sectors, particularly the equity markets, where funds often fuel speculative activities.
Sources familiar with the matter revealed that the regulator has initiated a comprehensive review of such shadow lenders as a preemptive measure to address potential crises arising from risky lending practices. The RBI aims to identify and intervene in cases of unhealthy lending practices to prevent the accumulation of systemic risks.
Recent regulatory actions by the RBI against non-banking finance companies (NBFCs) like JM Financial Products Ltd (JMFPL) and IIFL Finance underscore its commitment to curbing irregularities in lending activities, particularly in segments such as gold loans and equity market-related financing.
As the RBI expands its scrutiny to more shadow banks, it remains vigilant against lending exuberance in sensitive sectors. Stricter actions may be imposed if similar violations are detected, signaling the central bank’s resolve to maintain prudential lending standards.
Collaboration with the Securities and Exchange Board of India (SEBI) further strengthens the RBI’s efforts to identify and address risky lending practices in the equity markets, ensuring the stability and integrity of the financial system.
The Reserve Bank of India (RBI) has been vigilant regarding the potential risks associated with careless lending practices, particularly those linked to the stock markets. In late 2021, the central bank implemented a regulatory ceiling of Rs 1 crore per borrower on non-banking financial companies (NBFCs) lending for initial public offering (IPO) allotments, highlighting its concerns.
The cautionary stance from the RBI comes amidst a significant increase in bank lending to NBFCs, which rose by 16 percent over the past 12 months to reach Rs 15 lakh crore, compared to Rs 13 lakh crore a year earlier, as per RBI data. Moreover, there has been a notable surge in personal loans, including credit card debt, from banks, with outstanding amounts soaring by 28.8 percent over the past year.
Concerns arise when these unsecured personal loans, which offer borrowers discretion over their usage, are directed towards speculative activities in the stock markets. The central bank is wary of the implications of such funds being channeled into speculative endeavors, prompting a cautious approach to lending practices.
Previously, the RBI addressed risks associated with careless lending in the consumer loans segment by increasing the risk weights on such loans, signaling the need for banks to exercise prudence in expanding their unsecured loan portfolios. Despite being a lucrative business for banks due to high margins and robust demand, the central bank’s signals underscore the importance of exercising caution in the lending landscape.
RBI and Sebi Coordination: Scrutiny of Money Flow and Regulatory Actions
Close coordination between the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) has become increasingly critical in scrutinizing the flow of funds from banks to the stock markets. The recent case involving JM Financial Products Ltd (JMFPL) underscores this necessity, with both regulators referring to each other’s findings in their respective statements/orders while announcing actions.
On March 5, the RBI barred JMFPL from providing loans against shares and debentures, including loans against Initial Public Offering (IPO) shares, due to serious deficiencies in loans sanctioned for IPO financing and Non-Convertible Debenture (NCD) subscriptions. The central bank also raised concerns about governance issues and violations of regulatory guidelines within the company.
Subsequently, reports surfaced regarding serious irregularities, including violations of know your customer (KYC) and anti-money laundering (AML) norms, as well as the sharing and usage of customer data across group entities by JM Financial. The RBI reportedly held the company responsible for violating master directions on KYC, AML, and loan underwriting.
In response, JM Financial denied any material deficiencies in its loan sanctioning process or violations of applicable regulations. The company asserted that it conducts all business affairs in a bonafide manner and will continue to service its existing customers as advised by the RBI. Additionally, JM Financial expressed willingness to fully cooperate with the RBI’s special audit initiative and provide explanations regarding its position to the regulator.
Further Regulatory Actions Underway
The Reserve Bank of India (RBI) is gearing up for additional regulatory actions following recent interventions in the financial sector.
On March 4, the RBI directed IIFL Finance to cease sanctioning or disbursing gold loans immediately due to significant supervisory concerns identified in the company’s gold loan portfolio. An inspection conducted by the central bank revealed these concerns in relation to IIFL Finance’s financial position as of March 31, 2023.
Prior to this, on January 31, the RBI imposed business restrictions on Paytm Payments Bank, including a prohibition on accepting new deposits and engaging in credit transactions effective from February 29. This deadline was subsequently extended to March 15. The regulatory intervention was prompted by major irregularities in Know Your Customer (KYC) compliance, posing significant risks to customers, depositors, and wallet holders.
These actions reflect the RBI’s commitment to safeguarding the stability and integrity of the financial system by addressing and mitigating risks as they arise.