RBI Slams SFBs For Excessive Interest Rates, Unfair Practices

Reserve Bank Deputy Governor Swaminathan J has said it is 'disheartening' to see some small finance banks indulging in egregious practices like charging excessive interest rates from their borrowers hailing from the marginalized sections of the society. Exhorting such lenders to adopt sustainable business practices as they grow, Swaminathan said some of the SFBs are also collecting instalments in advance and not adjusting the collections against the outstanding loans, and also levying 'usurious fees'.

"As the target group of such lending is mostly the marginalised and underserved sections of the society, it is essential for the SFBs to adopt responsible lending practices," he said, addressing an RBI-organised conference of SFBs in Bengaluru last week.

"It is disheartening to come across egregious practices by some SFBs, such as charging excessive interest rates, collecting instalments in advance as well as not adjusting such advance collections against loan outstanding, levying of usurious fees" he said in the speech that was uploaded on Monday.

Swaminathan also asked SFBs to be more diligent on the leadership front, pointing out that the RBI has observed some SFBs are yet to ensure the presence of at least two whole-time directors even as they appoint newer members on boards.

He asked such entities to 'expeditiously consider' appointing more WTDs, pointing out that having just one whole-time director can create potential vulnerabilities, especially in times of transition or unforeseen circumstances.

However, he warned against an overdependence on high-cost term deposits or bulk deposits from a limited number of institutions and also asked them to evaluate any substantial asset exposures that could adversely impact the bank if they were to sour.

The DG also asked such banks to not onboard customers hastily without following the right know your customer rules.

Flagging the issue of staffing, he said the attrition for this cohort of lenders has been over 40% concentrated mostly in the junior management and frontline staff, and the same presents at operational risk.

SFBs have to play a crucial role in extending financial services to the underserved, fostering entrepreneurship, and driving inclusive growth that will be essential for India's progress towards becoming a high-income economy, he said.

It is 'essential' for such commercial entities to 'actively participate' in extending credit under various government sponsored schemes to promote greater accessibility of affordable credit, especially among the vulnerable sections of the society, he said.

The DG also asked the sector to focus on cyber security and third-party risks by having rigorous change management processes, comprehensive data protection measures, vigilant transaction monitoring, stringent access controls and network security protocols.

"I would urge Boards to consider the sustainability of their growth strategies and business models by conducting a thorough review of both the liability and asset sides of the balance sheet," he said.