MUMBAI: Reserve Bank of India (RBI) governor Shaktikanta Das on Wednesday cautioned non-banking financial companies (NBFCs) against adopting a ‘growth at any cost’ approach, as it could pose risk to the financial stability.
The governor asked NBFCs to adopt a “compliance first” approach and adhere to fair practices, warning that the central bank would not hesitate to take action against non-compliant entities.
“It is important that NBFCs, including MFIs (microfinance institutions) and HFCs (housing finance companies), 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,” Das said while announcing the monetary policy. “The Reserve Bank is closely monitoring these areas and will not hesitate to take appropriate action, if necessary,” he said.
Some NBFCs are aggressively pursuing growth without building up sustainable business practices and risk management frameworks, said the governor. “An imprudent ‘growth at any cost’ approach would be counter productive for their own health.”
There is a “push effect”, wherein “business targets drive retail credit growth rather than its actual demand,” Das said, adding that this may also pose a financial stability risk because of high cost and high indebtedness.
Having raised capital from domestic and foreign sources, some entities are chasing excessive returns on their equity, the governor said, pointing out that concern arises when interest rates become usurious and get combined with unreasonably high processing fees and frivolous penalties.
Experts say that NBFCs are likely to see stricter scrutiny from the banking sector regulator.
“Given the wider purpose for credit inclusion served by MFIs and HFCs, we don’t expect a general tightening of guidelines for the sector,” said Anil Gupta, senior vice president, co- group head – financial sector ratings, ICRA. “However, given the cautionary statements by the regulator, there could be more regulatory scrutiny around the business models and risk practices of some specific NBFCs. If the regulatory concerns remain unaddressed, entity-specific action cannot be ruled out.”
The governor also asked entities to review their staff compensation practices, variable pays and incentive structures, noting that some of these appear to be purely target-driven and may result in an adverse work culture and poor customer service.
Das also made it clear that the health parameters of banks and NBFCs continue to be “strong” even as there has been some commentary of stress build-up in unsecured segments. He asked banks and NBFCs to carefully assess their individual exposures to these areas, both in terms of size and quality, and have robust underwriting and monitoring of loans.
Source: The Financial Express
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