Ever since Reserve Bank of India’s tough action against Paytm Payment Bank Ltd (PPBL) on 31st January, 2024, the world of NBFCs (Non-banking Financial Companies) is anything but calm!
Those who were weaving conspiracy theories, the subsequent actions by RBI have nipped them in bud and sent out a strong message that any deviation from rules & regulations will be dealt with iron hands and that the regulator is least bothered about niceties (investors sentiments) social media pressure tactics by some mavericks from start up world!
The apex bank, known for its conservative outlook and precautionary actions, has shaken the NBFCs out of their post-Covid dream run, by striking against IIFL Finance Ltd and JM Financial Products Ltd subsequently, and if a message behind flurry of actions coming from RBI is to be read, we may hear more such actions in days to come!
The impact of RBI’s “bulldozer act” has wiped out Rs. 33,300 cr of market cap of these three NBFCs, mostly hurting retail investors directly and indirectly via mutual fund holding! The broader NBFC space too is facing the heat on bourses, but protecting retail investors’ money is not a mandate of RBI, it lies with SEBI, and the banking regulator is famously known as stickler to the book and uses section 35A of Banking Regulation Act and its precursor section 45(1)(b) only when it sees a serious threat to systematic stability.
People may have forgotten IL&FS crisis of 2018 which almost shook the financial system of India and even RBI was found to be on the back foot in that case. Since then much water has flown down the Ganga and RBI has tighten the reporting mechanism of NBFC and vigilance, and keep imposing penalty and take stricter actions from time to time.
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In the case of Paytm Payment Bank too, the RBI barred it from on boarding new customers on March 11, 2022, and it was only when no improvement was noticed in subsequent audits, it was left with no option but to take harsh action of threatening PPBL’s existence itself. Though the PPBL’s owner Vijay Shekhar Sharma has taken belated actions, but it seems that RBI has had enough!
Based on headline, people may think that RBI has taken action against only three NBFC entities, but that is equal to missing the larger picture. It is also not just about unsecured financing, on which RBI has put stricter curbs lately and raised risk weight to 125 per cent of retail loans, but essentially it is about the financial system and customers. Not without reason, RBI’s actions against IIFL Finance and JM Financial are on secured lending (Gold loans in case of IIFL and loans against secruties in case of JM Financial) side.
In the case of IIFL Finance, RBI has taken action on finding “deviations in assaying and certifying the purity and net weight of the gold at the time of sanction of loans and at the time of auction upon default”, “breaches in loan-to-value ratio”, “significant disbursal and collection of loan amount in cash far excess of statutory limit”, “lack of transparency in charges bring levied to customer accounts” etc.
Whereas in JM Financial’s case, the banking regulator found “company repeatedly helped a group of its customers to bid for various IPO and NCD offerings by using loaned funds.” The credit underwriting of these funds, according to the RBI, was found to be “perfunctory” and “financing was done on meager margins”. In a matter of serious systematic deviation, JM Financial was found to be operating applications for subscriptions “using a Power of Attorney (PoA) and a Master Agreement obtained from these customers without their involvement’. In a nutshell, the company was acting as both lender and borrower!
Interestingly, while shares of both Paytm and IIFL Finance dropped sharply and hit the lower circuit limits of 20% for at least two days after the outbreak of news, the JM Financial stock nosedived to lower circuit of 20%, but recovered and closed about 10% down only on the very next day (6th March) of news!
The findings of RBI are no less than startling and the findings pose a serious threat to the financial system of the country, and with financial system stability being one of its key mandates; the banking regulator must be lauded to nip in the bud the another financial earthquake in making, like the one in 2008!
(The views expressed are those of the author’s and do not necessarily reflect the editorial policy of The Theorist)
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