Fitch Alert: RBI’s Warning on Non-Bank Lenders Sparks Market Turbulence

Fitch Ratings has observed that the Reserve Bank of India’s (RBI) recent initiatives to enhance corporate governance and risk management in non-bank financial institutions (NBFIs) could lead to decreased industry risks over time if successful. However, in the short term, it may introduce volatility for affected non-bank entities.

The rating agency highlighted the RBI’s focus on addressing compliance gaps in the NBFI sector through recent advisories. One such advisory clarified that NBFIs must adhere to regulatory limits on cash loan disbursements below Rs 20,000, contrary to some lenders who had adopted a higher limit.

This directive particularly impacts gold loan providers, a segment where cash transactions are prevalent, especially among rural and semi-urban borrowers. Fitch noted that a significant portion of gold loan disbursements, typically ranging between Rs 50,000 to Rs 80,000, had been in cash prior to the RBI’s advisory.

Fitch anticipates that affected lenders will shift towards disbursing loans through bank accounts, considering the rising trend of bank-based disbursements even before the RBI’s notice. However, this transition may lead to a slowdown in new lending as borrowers accustomed to cash transactions adjust to banking channels.

Despite these challenges, Fitch expects established gold loan providers like Muthoot Finance Ltd and Manappuram Finance Limited to maintain resilient credit profiles, although acknowledging the emergence of new risks due to the RBI’s directives.

Regarding specific cases like the RBI’s action against IIFL Finance Ltd in March, Fitch outlined the regulatory concerns regarding cash disbursal practices and other deficiencies observed in the company’s gold loan portfolio.

Overall, while acknowledging the potential short-term disruptions and adjustments in the NBFI sector, Fitch remains optimistic about the long-term benefits of the RBI’s measures in enhancing governance and risk management practices.