Context:
The Reserve Bank of India (RBI) lifted the supervisory restrictions imposed on Chennai-based Asirvad Micro Finance Ltd., and Delhi-based DMI Finance Private Ltd. with immediate effect.
- Reason for Lifting Restrictions:
- The RBI was satisfied with the changes implemented by the companies to ensure fairness in loan pricing.
- Background:
- The restrictions were initially imposed in October due to concerns over excessive interest rates charged to borrowers, specifically linked to the weighted average lending rate (WALR) and interest spread over the companies’ cost of funds, which were deemed too high.
- The weighted average lending rate (WALR) is the average lending rate for a group of loans.
- As of the end of November 2024, the WALR on fresh rupee loans from commercial banks was 9.40%, down from 9.54% in October 2024.
- The restrictions were initially imposed in October due to concerns over excessive interest rates charged to borrowers, specifically linked to the weighted average lending rate (WALR) and interest spread over the companies’ cost of funds, which were deemed too high.
The Reserve Bank of India has the following supervisory restrictions imposed on banks:
- Prompt Corrective Action (PCA) Framework
- This framework puts a restriction on lending by the banks that have financial difficulties and watches them until the financial position is improved.
- PCA Framework includes restrictions in the form of dividend distribution, branch expansion, and management compensation.
- Capital-related actions
- Making the banks review capital planning at the board level
- Compelling banks to file plans to raise additional capital
- Compelling banks to raise their reserves through retained profits
- Limiting investment in subsidiaries and associates
- Limiting the expansion of high risk-weighted assets
- Reducing exposure to high risk sectors
- Limiting increasing stake in subsidiaries and other group companies
- Supervisory returns
- The RBI has standardized the filing of supervisory returns by banks.
- For instance, state-run banks are required to submit half-yearly and quarterly reviews of accounts within 21 days.
- Other supervisory initiatives
- Quarterly monitoring visits to banks
- Appointment of monitoring officers
- Direct monitoring of certain problem areas
- Monitoring cases of frauds perpetrated in banks
