RBI Governor Advises Vigilance On Potential Stress For Banks & NBFCs

Reserve Bank of India (RBI) Governor Shaktikanta Das emphasised on 22 November that while Indian banks and non-banking finance companies (NBFCs) are currently in a healthy state, they should remain vigilant about emerging stress on their books. 

Speaking at an event organised by industry bodies FICCI and the Indian Banks Association, Das urged banks and NBFCs to continue stress-testing their books. He mentioned that while there might not be an immediate cause for worry, it's advisable for financial institutions to take precautionary measures and ensure the robustness of their systems.

In response to the recent move by the RBI to increase the risk weight on consumer loans, Das cautioned banks about their exposure to NBFCs. He stressed the need for NBFCs to diversify their funding sources to minimise risks, considering the growing importance of non-bank financial companies in the financial system. Additionally, Das clarified that the increase in risk weight for consumer credit does not apply to housing loans and other asset-backed loans, as there is no observed stress in these borrowings.

The governor also expressed caution regarding the microfinance industry, noting that certain NBFCs-MFIs seem to be enjoying relatively higher net interest margins. He urged microfinance lenders to use the flexibility provided to them in setting interest rates judiciously, ensuring transparency and avoiding usurious practices.

Discussing the increased collaboration between banks, NBFCs and FinTechs, Das acknowledged the benefits of such partnerships. However, he urged caution, particularly in model-based lending through analytics. He emphasised the importance of robust and periodically tested models, cautioning against undue risk build-up due to information gaps in these algorithms. Overall, Das highlighted the need for continuous vigilance and proactive measures to maintain the health and stability of the financial system.