The Indian central bank is upset with erring non-banks. Why?

The Reserve Bank of India (RBI) has once again taken firm action against a prominent player in India’s financial services industry. On May 29, the RBI imposed strict restrictions on two firms within the Edelweiss Group, led by Rashesh Shah: ECL Finance Ltd, its non-banking financial company (NBFC) arm, and Edelweiss Asset Reconstruction Company Ltd (EARCL), headed by veteran banker Rajkumar Bansal.

ECL Finance Ltd has been instructed to halt all structured transactions, while EARCL has been barred from acquiring financial assets, including security receipts (SRs). These measures represent substantial constraints on their business operations.

Severe Regulatory Tone

The RBI’s statement was particularly severe, criticizing the Edelweiss Group entities for attempting to bypass regulations instead of addressing deficiencies. The statement emphasized that “instead of taking meaningful remedial action to rectify the said deficiencies, it was observed that the group entities were resorting to new ways to circumvent regulations.”

The central bank further noted that despite several months of engagement with the senior management and statutory auditors of these entities, no significant corrective action was evident, necessitating the imposition of business restrictions.

Recurring Issues

The primary reasons cited for the RBI’s actions were inadequate disclosure, insufficient reporting, and non-compliance with prudential norms. These issues have been common in the RBI’s recent actions against financial services companies over the past six months.

Recent Regulatory Crackdowns

The RBI’s crackdown began earlier this year with a major action against Paytm Payments Bank Ltd (PPBL) on January 31, just before the interim budget. This move was anticipated by Paytm’s Vijay Shekhar Sharma, given the prolonged engagement with the RBI over compliance concerns.

In early March, the RBI took back-to-back actions against IIFL Finance and JM Financial Products Ltd (JMFPL). On March 4, IIFL Finance was ordered to stop disbursing gold loans due to supervisory concerns. The next day, JMFPL was barred from issuing loans against shares and debentures, including IPO financing, due to significant deficiencies in their loan practices.

The RBI has been intensifying its scrutiny of various companies to identify non-compliance and rule violations, with further actions expected.

The RBI’s aggressive stance can be traced back to the collapses of DHFL and IL&FS between 2018 and 2020. These events raised questions about the RBI’s previous inaction and prompted a shift in regulatory approach. According to RBI insiders, the central bank typically gives companies about a year to rectify issues before taking decisive action if responses are inadequate.

“There is a clear message to the industry that no one—regardless of how big and connected the promoters are—will be spared if they don’t follow the rules,” said a former senior banker. The RBI’s tough stance on Paytm and Edelweiss underscores that no entity is above regulation.

Over the years, the RBI has bolstered its scrutiny of non-banks, enhancing both onsite and offsite inspections to detect early signs of non-compliance and enforce corrective measures. The recent actions should serve as a warning to the non-banking sector to adhere strictly to prudential norms or face the consequences of a vigilant regulator.