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Informist, Thursday, Dec. 26, 2024

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--NBFC sector's asset quality improved at aggregate level in FY24
--NBFC sector's capital adequacy improved at aggregate level FY24
--Dependence of NBFCs on banks remains high
--Fall in NBFCs' reliance on bks for funds good for financial stability
--NBFCs must further diversify sources of funds to mitigate risk
--'Growth at any cost' imprudent, counter-productive for NBFCs
--NBFCs should implement robust risk management frameworks
--NBFCs must avoid recourse to usurious interest rates to stay relevant

 

MUMBAI – The Reserve Bank of India on Thursday again warned non-banking finance companies against pursuing growth at all costs, adding that they must not levy usurious interest rates "to ensure their relevance in a fast-changing financial landscape".

 

"An imprudent ‘growth at any cost' approach would be counter-productive, and a robust risk management framework should be implemented. Moreover, they (NBFCs) need to strengthen their initiatives to address customer grievances, adhere to fair practices and avoid recourse to usurious interest rates so as to ensure their relevance in a fast-changing financial landscape," the Indian central bank said in its 'Trend and Progress of Banking in India 2023-24' report.

 

The comments by the central bank in the report echo those of Shaktikanta Das, the former governor, who said in October that while the health parameters of NBFCs continue to be strong, some companies were chasing growth far too aggressively under pressure from investors. As such, he called on them to follow sustainable business goals and "compliance first culture", adding that the central bank would not hesitate to act. On Oct. 17, just over a week after Das' warnings, the RBI ordered four NBFCs from sanctioning and disbursing loans.

 

In its report released Thursday, the RBI called on NBFCs to be vigilant about risks that could impact their stability and growth, including cybersecurity threats, concentration risks, and climate-related financial risks.

 

More generally, the central bank said that while the dependence of the sector on banks for funds has declined--as per RBI data, overall banks' exposure as a share of NBFCs' borrowings moderated to 42.7% as on Mar. 31, 2024 from 43.1% a year ago--and "bodes well for overall financial stability", the level of reliance remains high. As such, it said NBFCs need to "further diversify their sources of funds as a risk-mitigation strategy".

 

In terms of asset quality and capital adequacy, the RBI said the sector, on an aggregate level, had exhibited an improvement in FY24. This trend, the RBI said, continued in the first half of FY25, with the overall gross and net bad loan ratios declining to 3.4% and 1.1%, respectively, as at the end of September.

 

The RBI also said NBFCs' digital-first approach is helping in the flow of credit to Micro, Small, and Medium Enterprises. "This is expected to get a boost from the proposed unified lending interface."  End

 

Reported by Vaishali Tyagi

Edited by Deepshikha Bhardwaj

 

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