Key Takeaways
- The RBI has warned NBFCs for pursuing unsustainable, aggressive growth practices.
- NBFCs must follow sustainable business goals and risk management framework to ensure financial stability.
- The RBI will closely monitor NBFCs’ risk management framework and take appropriate action if necessary.
New Delhi: The RBI has issued a stern warning to Non-Banking Financial Institutions (NBFCs) for pursuing unsustainable growth practices. Sustainable business practices and risk management framework are essential for the health of NBFCs, and the RBI will take corrective measures if necessary.
NBFCs, in particular, have registered impressive growth over the last few years. This has resulted in more credit flow to the remote and underserved segments, bolstering financial inclusion. While the overall NBFC sector remains healthy, I have a few messages to the outliers, RBI Governor Shaktikanta Das, while stating the monetary policy.
“It is observed that some NBFCs are aggressively pursuing growth without building up sustainable business practices and risk management frameworks, commensurate with the scale and complexity of their portfolio. An imprudent ‘growth at any cost’ approach would be counter-productive for their own health,” Das said.
Driven by the significant accretion to their capital from both domestic and overseas sources, and sometimes under pressure from their investors, some NBFCs – including microfinance institutions (MFIs) and housing finance companies (HFCs)—are chasing excessive returns on their equity. While such pursuits are in the domain of the boards and management of NBFCs, concerns arise when the interest rates charged by them become usurious and get combined with unreasonably high processing fees and frivolous penalties.
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 NBFCs.
Further, the NBFCs may review their prevailing compensation practices, variable pay, and incentive structures, some of which appear to be purely target-driven in certain NBFCs. Such practices may result in an adverse work culture and poor customer service.
To sum up, it is important that NBFCs, including MFIs and HFCs, follow sustainable business goals; a ‘compliance first’ culture; a strong risk management framework; a strict adherence to the fair practices code; and a sincere approach to customer grievances.
The Reserve Bank is closely monitoring these areas and will not hesitate to take appropriate action if necessary. Self-correction by the NBFCs would, however, be the desired option.
