RBI Signals Crackdowns Through Speeches: What Governor Das’s Warnings Mean for NBFCs and Finfluencers

The Reserve Bank of India (RBI) has been using public speeches by its top officials to give hints about upcoming regulatory actions. A recent analysis by Mint shows that these speeches often foreshadow steps taken against certain institutions or practices in the financial sector.

For example, on October 17, the RBI announced a ban on four non-banking financial companies (NBFCs), including two microfinance firms, from issuing new loans. This was due to concerns about how these companies were pricing their loans. Just a week earlier, RBI Governor Shaktikanta Das warned that some NBFCs were focusing too much on rapid growth without adopting strong business practices and proper risk management. He also pointed out that some of these companies were charging very high interest rates, adding unreasonable processing fees, and imposing unnecessary penalties.

Warnings Before Action

This pattern is not new. In May, just before the RBI took action against Edelweiss Asset Reconstruction Company (ARC), two deputy governors made speeches highlighting issues with some asset reconstruction companies (ARCs). They noted that certain ARCs were selling assets to related companies without maintaining proper independence in transactions.

Although the speeches don’t mention specific companies by name, they serve as warnings to the industry as a whole. Other regulators, like the Securities and Exchange Board of India (SEBI), have also used public statements to signal upcoming actions. For example, SEBI recently asked companies to cut ties with unregistered financial advisors, including so-called “finfluencers.”

According to a former RBI official, speeches by the governor and deputy governors are now being used to signal not only monetary policy shifts but also upcoming regulatory actions. This allows the market to be better prepared and ensures more transparency. These speeches often follow private discussions between the RBI and the companies under scrutiny.

RBI’s Signalling Strategy

Experts believe the RBI has been giving clear signals before taking any harsh actions. But, as seen with unsecured lending, many companies don’t pay attention to these warnings. In October 2023, the RBI cautioned against rapid growth in unsecured lending. A month later, they increased the risk levels for such loans. This move helped slow down the growth of unsecured lending in the following months.

Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services LLP, said that the RBI wants lenders to be ready for possible future defaults. Public speeches are a way to communicate the RBI’s concerns to the market. He also pointed out that with the economy likely to grow at a slower rate, there’s a higher risk of defaults. If lenders don’t adjust, they might end up with a large number of bad loans.

In February, Deputy Governor Rajeshwar Rao pointed out risks in the peer-to-peer (P2P) lending sector, noting that some companies were promising high returns and offering risky financial products. Six months later, the RBI tightened the rules for P2P lenders. Several P2P platforms, including Faircent, Monexo, Rang De, and Finzy, were issued notices by the RBI for their practices.

Leveraging Speeches for Market Impact

According to Vivek Iyer, a partner at Grant Thornton Bharat, former RBI governors introduced the practice of using speeches to signal regulatory intentions, and it has continued under the current leadership. He added that even if the speeches only hint at the RBI’s concerns, they are enough to move the market. This approach is particularly useful for NBFCs, where the number of companies regulated by the RBI is much larger than the capacity to monitor them individually. Using speeches helps the RBI communicate its broader expectations.

In addition to public speeches, the RBI also engages with industry stakeholders through discussion papers and draft guidelines. This process helps the industry understand the regulator’s evolving expectations. For example, the RBI’s recent focus on Know Your Customer (KYC) practices and cybersecurity has resulted in significant changes to KYC rules and the introduction of a comprehensive cybersecurity framework.

By using public speeches and other forms of communication, the RBI is providing clear signals to the market about its regulatory direction, ensuring transparency and giving companies a chance to adjust before stricter actions are taken.