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Informist, Wednesday, Oct. 9, 2024

 

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--Strong NBFC growth in recent yrs bolstered fincl inclusion
--NBFCs have seen robust growth over last few years
--NBFC growth aiding credit availability in broader economy
--NBFC sector healthy, but there are some outliers
--Some NBFCS pursuing growth without risk management framework
--Some NBFCs are chasing excessive returns on their equity
--NBFCs should avoid imprudent growth at any cost
--NBFC business targets pushing credit growth, rather than demand
--High cost, high indebtedness could pose risk to NBFCs stability
--NBFCs should review their target-based compensation structures
--Important NBFCs follow strong risk management
--Important NBFCs follow consumer protection practices
--Self correction by NBFCs desired action
--Would prefer if NBFCs practice self-regulation to reduce risks

 

MUMBAI – The Reserve Bank of India Governor Shaktikanta Das directed the outliers in non-banking finance companies to follow sustainable business goals, a "compliance first" culture, strong risk management framework and a strict adherence to a fair practices code. "The Reserve Bank is closely monitoring these areas and will not hesitate to take appropriate action, if necessary. Self-correction by the NBFCs (non-bank finance companies) would, however, be the desired option," Das said while announcing the outcome of the monetary policy committee meeting Wednesday. 

 

He said that even though non-bank finance companies have shown impressive growth in the past few years, there are some outliers who have been pursuing growth without building up sustainable business practices and risk management frameworks. He said that the "growth at any cost" approach would be counter-productive.

 

The RBI found that supervised entities such as non-bank lenders, banks had several irregularities while giving out loans against gold ornaments and jewellery. On Sept. 30, the central bank issued a circular advising such entities to review their policies, processes and practices on gold loans. It also urged to find gaps in the process and take appropriate action in a time-bound manner.

 

Das in his speech also highlighted that in order to garner capital from domestic and overseas sources, non-banking finance companies, including the microfinance institutions and housing finance companies, have been chasing excessive returns on their equity. "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," Das said.

 

He said that 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 non-bank lenders," he said. 

 

Das also said that non-bank lenders must review their compensation practices, variable pay and incentive structures as such practices may result in adverse work culture and poor customer service.  End

 

Reported by Kshipra Petkar

Edited by Deepshikha Bhardwaj

 

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