RBI Urges Small Finance Banks to Stop Unethical Lending Practices

Synopsis: The Reserve Bank of India (RBI) has called on small finance banks (SFBs) to stop unethical lending practices such as charging excessive interest rates and poor loan management. Deputy Governor Swaminathan J highlighted these concerns in a recent address, urging SFBs to prioritize responsible lending, especially when dealing with marginalized communities. This aligns with RBI’s broader goals of improving governance and promoting financial inclusion to support India's progress toward becoming a developed nation by 2047.

The Reserve Bank of India (RBI) has issued a stern warning to small finance banks (SFBs), urging them to cease predatory lending practices and adopt responsible policies. Deputy Governor Swaminathan J emphasized that SFBs should play a pivotal role in fostering financial inclusion, especially among marginalized communities. However, the RBI has observed some troubling practices, including exorbitant interest rates, advance collection of installments, and improper adjustments of these payments to outstanding loans. These actions harm vulnerable borrowers and undermine the credibility of the financial system.

In a recent speech at a conference for SFB directors, Swaminathan reiterated the need for responsible lending, echoing earlier concerns raised by RBI Governor Shaktikanta Das. Both officials noted that some non-bank financial companies (NBFCs) and microfinance institutions (MFIs) are also guilty of charging usurious rates on small-value loans, which disproportionately impact underserved communities. The RBI has stressed the importance of financial entities safeguarding customer interests while ensuring the stability of the overall financial system.

Swaminathan further urged SFBs to actively participate in government credit schemes aimed at boosting financial access for low-income groups. Additionally, he emphasized the need for improved governance within these banks, calling for stronger boards and better succession planning to ensure long-term resilience. Grievance redressal mechanisms were also highlighted as a weak spot, with many SFBs failing to provide adequate support to customers facing issues.

The RBI's concerns are part of broader efforts to regulate the financial industry, ensuring that SFBs contribute positively to India’s economic development, especially in the drive toward becoming a high-income nation by 2047.