RBI governor warns NBFCs pursuing ‘growth at any cost’

Reserve Bank of India governor Shaktikanta Das on Wednesday cautioned that some non-banking financial companies (NBFCs) are pursuing an imprudent ‘growth at any cost’ approach that would be counter-productive for their own health.

“It is observed that some NBFCs are aggressively pursuing growth without building up sustainable business practices and risk management frameworks, commensurate with the scale and complexity of their portfolio,” Das says while announcing the Reserve Bank of India’s monetary policy statement.

The RBI governor says it is important that non-bank lenders, including microfinance institutions (MFIs) and housing finance companies (HFCs), follow sustainable business goals, a ‘compliance first’ culture, a strong risk management framework, a strict adherence to fair practices code and a sincere approach to customer grievances.

“The Reserve Bank is closely monitoring these areas and will not hesitate to take appropriate action, if necessary. Self-correction by the NBFCs would, however, be the desired option,” he warns.

NBFCs have registered an impressive growth over the last few years, resulting in more credit flow to the remote and underserved segments, bolstering financial inclusion.

While the overall NBFC sector remains healthy, Das says his message is to the outliers.

“Driven by the significant accretion to their capital from both domestic and overseas sources, and sometimes under pressure from their investors, some NBFCs – including microfinance institutions (MFIs) and housing finance companies (HFCs) – are chasing excessive returns on their equity,” says Das. While such pursuits are in the domain of the Boards and Managements of NBFCs, concerns arise when the interest rates charged by them become usurious and get combined with unreasonably high processing fees and frivolous penalties, he says. “These practices are sometimes further accentuated by what appears to be a ‘push effect’, as business targets drive retail credit growth rather than its actual demand. The consequent high-cost and high indebtedness could pose financial stability risks, if not addressed by these NBFCs,” he explains.

NBFCs may review their prevailing compensation practices, variable pay and incentive structures some of which appear to be purely target driven in certain NBFCs, the RBI governor says. Such practices, he says, may result in adverse work culture and poor customer service.

There has been some recent commentary on likelihood of stress buildup in a few unsecured loan segments like loans for consumption purposes, micro finance loans and credit card outstandings, says Das. The Reserve Bank is closely monitoring the incoming information and will take measures, as may be considered necessary, he adds.

Banks and NBFCs, on their part, need to carefully assess their individual exposures in these areas, both in terms of size and quality, the RBI governor says. “Their underwriting standards and post-sanction monitoring have to be robust. Continued attention also needs to be given to potential risks from inoperative deposit accounts, cybersecurity landscape, mule accounts, etc.”