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Informist, Thursday, Apr. 10, 2025

 

NEW DELHI – Non-banking financial companies in India have witnessed rapid growth over the past few years, increasing their importance in overall financial system. But as they become more systemically important, their standards of governance, risk management, and customer treatment must rise accordingly, Reserve Bank of India Deputy Governor Swaminathan J. says.

 

"Risk-taking must be intelligent and well planned, and never beyond the risk absorption capacity of the entity concerned. Liquidity and credit risks must be rigorously assessed and managed," Swaminathan said at a conference of NBFCs on Mar. 28. The deputy governor's speech was made public on the RBI website on Thursday. "Asset-liability mismatches, nature and tenor of the funding sources, and concentration risks all need board-level oversight which should be ably supported by robust internal controls."

 

Swaminathan said the business model of NBFCs is effective but has structural risks and demands heightened focus on risk management. If NBFCs don't manage the risks associated with their business model carefully, it can create vulnerabilities, especially during periods of market stress or liquidity shocks, he added.

 

"Unfortunately, some NBFCs think they can pursue a business model where it is par for the course to resort to weak underwriting in pursuit of quick growth, coupled with excessive and unsustainable interest rates -- at times masked as upfront charges or processing fees -- which is followed by aggressive recovery practices upon default," Swaminathan said. "Let me state unequivocally: this is not an acceptable model."

 

The deputy governor said that financial inclusion cannot be used as a pretext for financial exploitation. He also called on statutory auditors to convert audit observations into timely corrective actions, and not keep them confined to meeting minutes.

 

Swaminathan said that recent incidents in India and abroad have shown that traditional financial audits must evolve. "Red flags must not be ignored. Complex structures, derivatives, off-balance sheet items, related party transactions, and provisioning policies must be closely examined," he said.

 

The deputy governor's comments come nearly a month after IndusInd Bank reported discrepancies in its derivative accounts, which may hit the lender by about 2.35% of its INR 651.02-billion net worth as of Dec. 31. As such, an adverse impact of 2.35% amounts to about INR 15.30 billion. The IndusInd Bank case has raised questions over supervision and audit controls.

 

In the recent past, the RBI has taken supervisory actions against NBFCs for breach of norms. In March 2024, IIFL Finance was barred by the central bank from sanctioning or disbursing gold loans. The restrictions were lifted in September that year.  End

 

Reported by Shubham Rana

Edited by Ashish Shirke

 

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