RBI Governor Shaktikanta Das Warns NBFCs Against Imprudent Growth, Compliance Culture

In a broad message to the non-banking financial services sector, the Reserve Bank of India Governor Shaktikanta Das on Wednesday warned the companies against imprudent growth, unfair business practices and usurious interest rates charged by certain outliers.

While the central bank is bilaterally engaging with these NBFCs, Das said that it is a major message not only for the outliers to keep in mind but should also act as a guidance for the entire sector.

"The consequent high cost and indebtedness could pose financial stability risks if not addressed by these NBFCs in time," he said while announcing the monetary policy.

The RBI is closely monitoring these areas of concerns and will not hesitate to take appropriate action, if necessary, he said, adding that self correction by NBFCs would, however, be the desired option.

At the post monetary policy conference, Deputy Governor Swaminathan J said that June to August numbers show there are certain elevated slippages and higher credit costs being seen in select segments.

"So the messaging is targeted towards such NBFCs that are pursuing high risk, high growth strategy and also to certain segments, which are likely to see stress in our estimate," he said.

This has come as the RBI has observed that some NBFCs are aggressively pursuing growth without building up sustainable business practices and risk management frameworks, which should be commensurate with the scale and complexity of their portfolio, Das said.

"An imprudent growth at any cost approach would be counterproductive for their own health. Driven by significant accretion from both domestic and overseas sources and sometimes under pressure from their investors, some NBFCs including MFIs, housing finance companies are chasing excessive returns on their equity," he said.

While such pursuits are in the domain of the boards of these NBFCs, what is concerning is interest rates charged are becoming usurious along with unnecessary high processing fees and frivolous penalties.

Das has asked NBFCs to review their compensation practices, variable pay structures, which appear to be purely target driven in certain NBFCs, as such practices may result in adverse work culture and poor customer service.

In a nutshell, Das said that it is important that NBFCs including microfinance institutions and housing finance companies follow sustainable business goals, a compliance first culture, a strong risk management framework, a strict adherence to fair practices code and a sincere approach to customer driven grievances.

In addition, he also said that the central bank does not treat banks and NBFCs or any other institutions as adversaries.

"We work closely with them in the spirit of cooperation...Its not an adversarial relationship but as the regulator and supervisor of the financial system, it is our duty to point out possible or potential risks becoming more serious," Das responded to a query at the post policy press conference.

These guidelines have come as retail growth has been outpacing overall banking sector credit growth. Last year, the central bank had increased risk weights on personal loans given out by banks and that of banks' exposure to NBFCs.

As of August, non-food bank credit growth rose 15% on year against personal loans, which grew 16.9% on year and credit card outstanding nearly 20%, latest RBI data showed.