RBI Action Against Online Loan Disbursal Ignites Concern on NBFCs

The Reserve Bank of India (RBI) has directed Bajaj Finance to halt the issuance of loans under its eCOM and Insta EMI Card products due to non-compliance with digital lending guidelines. 

In a statement on November 15, 2023, the RBI invoked Section 45 L (1) (b) of the Reserve Bank of India Act, 1934, citing the company's failure to provide Key Fact Statements (KFS) to borrowers and deficiencies in KFS for other digital loans. The supervisory restrictions will be lifted upon rectification of these issues.

This move by the RBI stems from Bajaj Finance’s violation of digital lending rules, particularly its failure to furnish KFS to borrowers under eCOM and Insta EMI Card. The deficiencies in KFS issued for other digital loans further exacerbated the situation.

What is an NBFC?
A Non-Banking Financial Company NBFC is a company registered under the Companies Act, 1956 engaged in the business of loans, advances, acquisition of shares, stocks, bonds, debentures, securities issued by the Government or local authority or other marketable securities like leasing, hire-purchase, insurance, business and chit business.

As an NBFC under the Companies Act, 1956, Bajaj Finance has faced repercussions for its non-adherence to the RBI’s digital lending guidelines. The guidelines, implemented in September 2022, aim to curb the uncontrolled growth of instant digital personal loans and enhance customer and data protection.

One of the framework’s major requirements was for regulated lenders to provide borrowers with a “key fact statement” in a standardised format before the loan is approved. 

Importance of KFS
The KFS is a standardised document across lenders, based on templates given by the RBI. As per RBI’s guidelines on digital lending, the KFS has to specify details like the loan amount, the tenure, the rate of interest, the repayments due, other fees, and penalties a customer might incur, details about third parties involved in the contract, details of the grievance redress officer, and the cooling-off period.

As of September 2023, Bajaj Finance had over 4.2 crore EMI cards in circulation, a 22% increase from the previous year. During Q2 FY 24, it digitally acquired 6.8 lakh EMI cards. The Insta EMI card enables users to make purchases of up to Rs. 2 lakh at zero cost across both online and offline stores, with a repayment period of up to 60 months.

Online Lending Warnings
Recently the RBI in its September month bulletin expressed concern on NBFCs increasingly relying on bank borrowings as their primary source of funding.

But a conclusive analysis by the Centre for Advanced Financial Research and Learning (CAFRAL) issued warnings about the surge in online lending led by NBFCs. Users downloading lending apps face challenges verifying their legality, exposing them to potential scams and misuse of personal information.

The report said, “there are concerns about the spill over of losses from the online lending activities to the traditional banking sector. The stronger the linkages between the traditional lending and online lending sectors, the larger the spill over.”

Thomas Franco, a banking expert, raised concerns about the risk posed to the banking system by NBFCs. 

While acknowledging Bajaj Finance’s significance, he said, “Bajaj Finance is one of the largest NBFCs especially in the vehicle finance domain but has been mired in issues like overcharging and the broader challenge of controlling and regulating numerous NBFCs.”

He added, “To implement rules on paper, RBI is not having the well equipped staff strength to monitor NBFCs effectively along the entire banking system.”

In line with RBI guidelines, NBFCs are permitted to take loans from the regular banking system for lending. However, their expanding lending operations, coupled with instances of online lending failures, raise concerns about potential risks to the broader banking sector.