IIFL, Paytm Crackdowns Show RBI Wants To Nip Misgovernance In The Bud

After fintech companies, the Reserve Bank of India (RBI) has tightened its scrutiny of non-banking financial companies (NBFCs). On Monday, the RBI barred financial services company IIFL Finance with immediate effect from sanctioning or disbursing gold loans after certain material supervisory concerns were observed in its gold loan portfolio.

“This is the new Reserve Bank of India and it wants to nip in the bud. Be it banks, NBFCs, or gold loan companies like IIFL, be it Bajaj Finance, these are systemic issues. One bank or one NBFC can affect others… RBI which does not encourage misgovernance and entities taking the system for a ride will not be able to do this for long. RBI is pretty alert,” Tamal Bandopadhyay, a veteran commentator on banking issues, told The Core.

IIFL was reportedly sanctioning loans without fully checking the purity of the gold that was being offered as collateral which came to light at the time of auction when the borrowers defaulted. RBI’s immediate actions are because, according to Bandopadhyay, under governor Shaktikanta Das the regulatory body is now more interventionist and aggressive. It takes a lot of effort with backchannel negotiations to resolve failings. All of which the public would not know right till the end.

RBI’s Issues Against IIFL

The RBI said IIFL Finance can, however, continue to service its existing gold loan portfolio through the usual collection and recovery processes, the RBI said in a statement. "The RBI has today...directed IIFL Finance Ltd to cease and desist, with immediate effect, from sanctioning or disbursing gold loans or assigning/ securitising/ selling any of its gold loans," it said.

The RBI said an inspection of the company was carried out by it concerning IIFL's financial position as of March 31, 2023. "Material supervisory concerns were observed in the gold loan portfolio of the company, including serious deviations in assaying and certifying purity and net weight of the gold at the time of sanction of loans and at the time of auction upon default...," it noted.

These practices, apart from being regulatory violations, also significantly and adversely impact the interest of the customers, the central bank said. The supervisory restrictions will be reviewed upon completion of a special audit to be instituted by the RBI and after rectification by the company of the special audit findings and the findings of RBI inspection to the satisfaction of the central bank, the statement said.

The crackdown against IIFL is the latest among a series of such actions by RBI against players in the financial sector. RBI’s actions have led to questions on whether they reflected a larger systemic problem arising out of the retail excesses of the last few years.

RBI Against Fintech?

The RBI has been scrutinising governance issues in financial companies for a while now. In November, it banned leading NBFC Bajaj Finance from sanctioning and disbursing loans under its lending products like  'eCOM' and 'Insta EMI Card.’ Even banks have not been spared from regulatory action. The RBI directed the Bank of Baroda last year to suspend any further onboarding of customers onto their mobile app 'bob World' after it found significant supervisory concerns during the customer onboarding process for the app. The recent IIFL crackdown comes days after it barred fintech major Paytm’s digital lending arm Paytm Payments Bank from offering banking services. 

The action against Paytm Payments Bank has led to protests against RBI’s move from the fintech community. Numerous founders and investors, expressing their views on public platforms, have called RBI’s directive severe and could potentially impact millions of consumers and businesses. 

According to Bandopadhyay, technology, and finance are inextricably interlinked. However, the principles governing the worlds of technology and finance/banking are quite different. 

“Why does fintech come in? (The action) is against a payments bank. Fintech has two different things, fin, and tech. As far as finance is concerned, it's all about managing risk. It's all about trust. Tech does not care about that at much… And if you call it an attack on a fintech, then anything happens to ICICI, HDFC, Axis Bank, or even State Bank of India, you can call it an attack on fintech because there's a digital bank within every bank,” Bandopadhyay said.