RBI Governor Raises Concerns Over Increased Bank Borrowing by NBFCs

RBI Governor Shaktikanta Das expressed concerns on Wednesday about the escalating bank borrowings by non-banking financial companies (NBFCs), citing the growing interconnectedness among financial institutions as a potential "contagion risk." Speaking at a banking event organised by FICCI and the Indian Banks’ Association (IBA), Das noted that NBFCs, being substantial net borrowers, especially from banks, could pose risks due to concentrated linkages and urged banks to continually assess their exposure to NBFCs.

Over recent years, the reliance of NBFCs on bank borrowings has surged significantly. According to CRISIL, bank loans to NBFCs have witnessed a compound annual growth rate (CAGR) of 18 per cent over the past five years, reaching Rs 12.3 lakh crore in September 2023 from Rs 5.5 lakh crore in September 2018. While acknowledging the resilience of the Indian banking system, Das emphasised the importance of precautionary measures to avert potential crises. He urged banks and NBFCs to strengthen risk management practices and build additional buffers to navigate adverse business cycles.

Das cautioned against excessive credit growth and advised financial institutions to avoid exuberance in their lending practices. Additionally, he highlighted the need for vigilance in the use of artificial intelligence (AI) and pre-set algorithms in lending decisions. Das underscored the risks associated with model-based lending through analytics, emphasising the periodic testing and recalibration of such models to align with the evolving financial landscape. He stressed the importance of being alert to any undue risk buildup in the system resulting from information gaps in these models, which could lead to a dilution of underwriting standards.