The Reserve Bank of India (RBI) canceled Certificates of Registration (CoR) of two Non-Banking Financial Companies (NBFCs), Polytex India Ltd and Star Finserv India Limited, on Monday (8 July, 2024) over their involvement in irregular lending practices.

This decision, made under Section 45-IA (6) of the Reserve Bank of India Act, 1934, bans these companies from continuing their operations as Non-Banking Financial Institutions (NBFIs).

Advertisement

Polytex India Ltd

RBI noticed significant violations by Polytex India Ltd concerning its code of conduct and outsourcing practices. The company’s CoR was canceled due to the following reasons:

Outsourcing Core Functions:  Polytext India Ltd has outsourced critical functions such as client sourcing, KYC verification, credit appraisal, loan disbursal, recovery, and complaint resolution, which are essential for financial compliance and integrity.

Unfair Profit Sharing Arrangement: The company engaged in an arrangement where it earned a fixed fee from its service provider, while the service provider earned the interest charged on the borrower, often at exorbitant rates. This practice violated the Fair Practice Code (FPC) Guidelines issued by the RBI.

Star Finserv India Limited

Star Finserv India Limited also faced cancellation of its CoR for multiple infractions related to its digital lending operations. The key violations included:

Outsourcing of Core Lending Functions: The company violated RBI guidelines on outsourcing financial services in its digital lending operations by delegating critical decision-making tasks, including credit appraisal, loan sanctioning, and KYC verification, to a service provider.

Data Confidentiality Breach: The company violated data confidentiality and security by giving the service provider complete access to customer information.

Also Read: Why RBI Fined Punjab National Bank (PNB) and Four Other Banks

Fair Practices Code Violation: Lastly, the company failed to meet the RBI’s Fair Practices Code by not providing customers with loan agreements and sanction letters in their vernacular language.

The RBI’s actions highlight its commitment to ensuring ethical practices and protecting consumer interests in the financial sector. By canceling the registrations of these NBFCs, the RBI aims to maintain the integrity of the financial system and prevent malpractice.

Want to learn the art and science of managing your money? The 1% Club can help. Details here