RBI’s Stringent Actions Aimed at Ensuring Ethical Business Practices, Analysts Say

The Reserve Bank of India (RBI) has taken decisive actions to clean up the financial sector, imposing embargoes on IIFL Finance’s gold loan business and JM Financial Products’ loan against shares & IPO financing business. Analysts view these measures as essential for ensuring ethical business practices and maintaining regulatory compliance.

In January, RBI had previously barred Paytm Payments Bank from accepting fresh deposits and conducting credit transactions after February 29, citing repeated violations and non-compliance with rules. The deadline for compliance was later extended to March 15.

The financial penalties and business embargoes, including the recent actions against IIFL Finance and JM Financial Products, signify the RBI’s commitment to zero tolerance for persistent regulatory non-compliance or governance issues. While these actions are expected to impact the growth of non-banking financial companies (NBFCs) in the short term, analysts believe they will contribute to fostering an environment of ethical lending and business practices.

Emkay Global Financial Services analysts note that while the punitive measures may affect systemic growth for NBFCs in the short term, they are likely to curb unethical business practices and enhance stakeholder confidence in the long run.

IIFL Finance, facing an embargo on its gold loan business, emphasized that the concerns raised by RBI were operational in nature and not a result of any unethical practices by the company. In the case of JM Financial Products, restrictions were imposed due to deficiencies observed in the company’s IPO and NCD subscription financing business.

Analysts anticipate a limited benefit for banks from the fallout of IIFL Finance, given the different customer profiles of NBFCs. They also expect the actions to prompt banks to review their partnerships with fintechs to avoid regulatory scrutiny, potentially impacting growth.

After the RBI’s actions against Paytm Payments Bank, analysts had predicted an impact on unsecured loan growth for some NBFCs. However, they identified potential winners in the fintech space, such as Zaggle, and suggested that traditional banks and certain NBFCs, including ICICI Bank, SBI, Karur Vysya Bank, Shriram Finance, and M&M Financial Services, could fare better in the current regulatory environment.

In summary, the RBI’s recent actions are seen as a necessary step toward maintaining regulatory compliance, ensuring ethical business practices, and fostering long-term confidence in the financial sector.