A sharp jump in banks’ exposure to non-banking finance companies (NBFCs) has the RBI worried.
Recent data from the RBI underscores a notable increase in banks’ exposure to NBFCs by 35.1 percent year-on-year, reaching Rs 14.2 lakh crore by June 2023. Correspondingly, the share of NBFCs in the overall bank credit has surged to 9.9 percent from 8.5 percent merely a year ago. This progression raises concerns regarding the augmented indirect exposure of banks to the unsecured segment, which has been a driving force behind the expansion of NBFCs.
Recently, in a meeting with NBFCs, RBI Governor Shaktikanta Das, while acknowledging the enhanced financial stability and operational robustness demonstrated by NBFCs and HFCs, underscored the need for vigilant oversight, even during favourable economic conditions. He stressed the significance of reinforcing governance standards and establishing robust assurance mechanisms, particularly in areas of compliance, risk management, and internal audits.
The deliberations aimed at diversifying the funding resources of these financial entities. The objective behind this diversification is to mitigate the growing dependence on bank borrowings, thus reducing potential risks linked with soaring credit growth within the unsecured retail segment.
RBI’s concerns
The agenda encompassed a comprehensive array of concerns, including the enhancement of IT systems and cybersecurity defences, bolstering balance sheets through improved provisioning coverage, diligent monitoring of stressed assets and slippages, rigorous asset-liability management practices, ensuring equitable and transparent credit pricing, and upholding the Fair Practices Code. The overarching goal is to ensure a resilient financial ecosystem and bolster consumer trust through stringent adherence to industry norms.
Deputy Governors M. Rajeshwar Rao and Swaminathan J., along with S. K. Hota, Managing Director of the National Housing Bank (NHB) were present in the meetings. These discussions included key leaders of NBFCs and HFCs, which collectively account for nearly half of the total assets held by NBFCs and HFCs combined.
In line with its commitment to maintaining financial stability and fostering responsible lending practices, the RBI has advised NBFCs, including HFCs, to prudently manage their reliance on bank borrowings. The central bank has also sounded a note of caution concerning the potential risks accompanying the growth of unsecured retail loans.
Governor Das commended the improved financial resilience exhibited by the NBFCs and HFCs in recent years. However, he stressed the necessity of sustained vigilance, especially during periods of economic prosperity. As India’s financial landscape continues to evolve, it remains imperative for financial institutions to strike a delicate balance between growth and risk management, thereby fostering a robust and enduring financial ecosystem.
