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RBI asks NBFCs to stick to Rs 20,000 cash loan pay-out limit

Author: Ankit Baid, Research Analyst at Affluence Advisory

The behind story:

The recent regulatory measures implemented by the RBI (Reserve Bank of India) targeting numerous banks, Non-Banking Financial Companies (NBFCs), and fintech firms underscore the significant emphasis regulators place on fostering a balanced and resilient ecosystem, whether in lending, IT governance, or credit expansion or addressing NPA’S and Provisioning.

While the regulatory actions this year have undoubtedly impacted business operations, they are deemed necessary to mitigate potential future challenges. The RBI collectively may be looking at the larger picture which is the cost worth paying to avert future problems. Does the memory of the decade-long NPA crisis serve as a poignant reminder?

  • Paytm Payment ban – Jan 2024 (Significant KYC irregularities)
  • JM Financials – March 2024 (Serious deficiencies observed in its loan sanctioning process)
  • IIFL Finance – March 2024 ( Breaches related to cash disbursement and other regulations)
  • Kotak Bank – April 2024 – (Data Security concern and deficient IT infrastructure)

This week, the banking regulator unveiled significant guidelines, with one specifically addressing provisioning. It introduced draft guidelines on the ‘Prudential Framework for Income Recognition, Asset Classification, and Provisioning for Advances — Projects under Implementation’. These guidelines suggest a gradual 5 percent standard asset provision during the construction phase. Additionally, they impose a stringent requirement on NBFCs to adhere to guidelines, citing Section 269SS of the Income Tax Act.

We shall focus on the latter.

India’s central bank issued a warning this week to certain non-bank lenders regarding the disbursement of cash loans exceeding the permissible limit of 20,000 rupee according to Reuters report. This move is expected to curb significant cash pay-outs to individuals borrowing against gold.

The advisory from the central bank comes shortly after regulatory action was taken against IIFL Finance, India’s second-largest gold loan provider, for breaching cash disbursement and other regulations. Let’s dissect this development: who will be affected, why, and what might follow.

Who?

This directive isn’t tailored for specific NBFCs; it applies universally to all of them. The Reserve Bank is emphasizing that the instruction isn’t selective but rather comprehensive, applying across the board to all NBFCs. It’s a clarification that cash payments exceeding Rs 20,000 are not permissible.

Why?

A considerable portion of gold loans are currently being distributed in cash, despite India’s prohibition on lenders disbursing cash loans exceeding 20,000 rupees to customers, as stipulated by income tax regulations. Non-bank finance companies (NBFCs) have been found to flout this regulation, issuing substantial cash loans and requiring customers to sign indemnities to accept liability against potential income-tax repercussions. This can be attributed to several key factors:

  • Intense competition within the sector, particularly from smaller players, has compelled non-bank lenders offering gold-backed loans to take excessive risks, such as surpassing the cash disbursement limit.
  • Retail lending in India has experienced significant expansion, notably evidenced by a threefold increase in loans secured against gold over the past four years. Consequently, a substantial portion of these gold loans is being disbursed in cash.
  • NBFCs were providing cash disbursements of up to ₹2 lakh, accommodating customer preferences, albeit subtly encouraging them to opt for bank account credits by offering discounts on lending rates. – Morgan Stanley
  • The RBI’s objective is likely to limit the creation of ‘undeclared income’ within the system and close any gaps in the current Income Tax regulations that certain NBFCs may have been breaching.

According to recent remarks from Muthoot Finance regarding the latest RBI guidelines, they believe that the implemented guidelines will not affect their volumes or business. This confidence stems from the fact that their customers typically possess bank accounts, enabling seamless real-time transfers.

Educating the customer is the key and major transaction is happening through this route as well customer paying interest online.

Previously, there was ambiguity regarding whether transactions exceeding Rs 20,000 could be conducted in cash. However, it has now been clarified that any amount exceeding Rs 20,000 must be transacted via cheque and through banking channels exclusively.

Also Read: NBFCs and IT Governance: Ensuring Future Readiness

What might follow?

The RBI’s directive to NBFCs, imposing a Rs. 20,000 cash loan limit and stressing adherence to income tax regulations, demonstrates proactive measures aimed at curbing cash-based lending and preventing irregularities. This initiative seeks to mitigate risks, uphold financial integrity, and protect consumer interests in the face of increasing competition within the retail lending sector. There’s a call for a standardized disbursal process across gold lenders

Lender – Total Loan Portfolio

Gold loan %

Transacted Online %

Manappuram Finance

84

40

Muthooth Finance

51

56

As per India Rating Decreased cash disbursements might result in a growth deceleration for gold loan NBFCs, as borrowers may opt to seek quicker disbursals and smoother operations from moneylenders or Nidhi companies, while they do not fall under direct regulation by the Reserve Bank of India (RBI), the RBI holds the authority to issue directives if they see volumes happening there.

Likely it is seen that customer would stick to regulated NBFC, not leading to major loss of business knowing that the directives issued by RBI are in the interest of the ecosystem and customers.

The managements of NBFC has shown optimistic view as stated by Muthoot Finance regarding the latest RBI guidelines, they believe that the implemented guidelines will not affect their volumes or business. This confidence stems that the sector shall sail this regulatory hurdle as well.

All NBFCs prioritize compliance, taking prompt action against any instances of non-compliance, as evidenced by past events.

Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement

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