RBI Acts Tough On NBFCs. Here Is What Means For You

The Reserve Bank of India (RBI) had lately expressed concern about growth in non banking financial company (NBFC) loan books raising questions about systemic hygiene and the potential for a credit bubble. 

“Keeping this in mind, the RBI has now sought detailed data from select non-banking financial companies (NBFCs) regarding their loan book growth, outstanding loan portfolios based on product type as well as annualised interest rates charged on these loans. RBI wants to ensure that NBFC are compliant with systemic hygiene standards particularly in some select product categories where interest rates charged are excessive or violate the fair practices code,” says Gaurav Goel, SEBI registered Investment Advisor. 

What does this mean for you? 

The regulator may circulate some tighter regulatory norms to suppress the credit risks in the coming future, notably for the loan segment with higher delinquencies. “Credit underwriting and provisioning norms for unsecured loans may become more stringent at NBFC level which will eventually affect pricing to the borrower followed by periodic review of NBFC’s portfolio mix to mitigate risks. The total loan portfolio could witness a significant drop until the portfolio quality shows no sign of deterioration,” says Sowdamini Bhat, CEO, LoanXpress, a quick loan platform. 

So, the scrutiny will be on unsecured loans or loans without collateral which have a higher rate of interest ranging from 11 per cent to 24 per cent. 

This would obviously mean greater scrutiny of loan books and tough times ahead for non-compliant NBFC’s. It is evident that RBI wants to keep a hawk eye on all such activities in order to ensure compliance and ward off any potential dangers amidst red hot credit growth in the economy before they become systemic in nature. “Borrowers will now have to ensure greater due diligence, follow standard system rules and regulations and keep deviations to the minimum. Certain non-compliant borrowers and face regulatory action from RBI to set an example for the entire industry,” says Goel. 

What Should You Do? 

“Borrowers should now be more mindful about the standard regulations and guidelines before granting loans. Delinquency levels among borrowers with loans below Rs 50,000 remain notably high,” says Goel. 

Most of the borrowers take out multiple loans to settle their other debts which can affect their credit score and debt to income ratio leading to higher credit risk affecting their financial security. “Borrowers should improve their credit history , compare the interest rates and all other costs charged by NBFCs in the market. Moreover, they should evaluate their ability to repay and other financial obligations before availing credit to avoid financial confusion and risk in future,” says Bhat.