RBI tightens rules on NBFC lending

The Reserve Bank of India (RBI) has intensified scrutiny of non-banking finance companies (NBFCs) regarding their lending practices, particularly concerning borrowers with existing defaults. During annual inspections, RBI officials have identified instances where NBFCs have issued new loans to customers whose previous loans were overdue, prompting concerns about 'evergreening'—a practice where new loans are extended to help borrowers repay existing debts. The RBI has mandated that NBFCs must have board-approved policies detailing the circumstances under which fresh loans can be extended to such borrowers, emphasizing the need for transparency and safeguards against misuse. This regulatory move aims to enhance the financial integrity of NBFC operations, especially for those with a net worth exceeding Rs 250 crore, which are required to adhere to more stringent accounting standards under IndAS. While the RBI is not outright prohibiting the issuance of new loans, it insists on accountability in lending practices to prevent potential financial distress from being obscured in their asset books. The RBI's approach reflects a broader commitment to ensuring stability and transparency in the Indian financial system, especially in the shadow banking sector.