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Informist, Monday, Sept. 30, 2024

 

NEW DELHI – Reserve Bank of India Deputy Governor Swaminathan J. has called on the country's small finance banks to adopt "responsible lending practices" and not charge excessive interest rates and usurious fees. The deputy governor also said that small finance banks had an important part to play in India becoming a developed nation by 2047.

 

"As the target group of such lending is mostly the marginalised and underserved sections of the society, it is essential for the SFBs (small finance banks) to adopt responsible lending practices," Swaminathan said in a speech at a Conference of Directors of Small Finance Banks in Bengaluru on Sept. 27. The central banker's speech was uploaded on the RBI's website on Monday.

 

"It is disheartening to come across egregious practices by some SFBs, such as charging excessive interest rates, collecting instalments in advance as well as not adjusting such advance collections against loan outstanding, levying of usurious fees, etc. It is also observed that grievance redressal mechanism is far from adequate in most SFBs," the deputy governor added.

According to Swaminathan, the targets for small finance banks are "very significant" as they are key to pushing financial services to the underserved, fostering entrepreneurship, and driving inclusive growth "that will be essential for India's progress towards becoming a high-income economy". As such, he called on them to "actively participate" in providing loans under the various government schemes to boost access to affordable credit, particularly when it comes to the vulnerable.

 

The deputy governor also emphasised the need for small finance banks to improve their governance standards, saying that bank boards should be strengthened and that succession planning should be at the top of their to-do lists. "We observe that while the SFBs are strengthening their boards by bringing in new directors, some SFBs are yet to ensure the presence of at least two whole-time directors. I would request these banks to expeditiously consider appointing more WTDs (whole-time directors)," he said.

 

In terms of their business, Swaminathan warned small finance banks that their boards should "consider the sustainability of their growth strategies and business models". In this, he cautioned against over-dependence on high-cost deposits from only a few institutions as well as high exposures. The other risks highlighted by Swaminathan related to proper credit risk underwriting, collection practices, cyber-security, and basic operational risks such as on-boarding new customers and the high attrition rate among small finance banks.

 

"While the branch network and employee headcounts are expanding, the sector faces a very high attrition rate of nearly 40%, particularly among frontline staff and junior management," he said, calling on the board to focus on employee retention strategies.  End

 

Reported by Siddharth Upasani

Edited by Saji George Titus

 

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