RBI Governor Highlights Concerns Over Lending Practices and Fintech Models
Reserve Bank of India (RBI) governor Shaktikanta Das has issued a cautionary statement regarding lending exuberance and overreliance on fintech models by financial institutions. In a recent speech at an event organized by industry lobby Ficci and the Indian Banks’ Association (IBA), Das emphasized the need for banks, non-banking financial companies (NBFCs), and other financial entities to account for risks while pricing loans and avoid excessive reliance on analytics-based lending when partnering with fintech companies.
Importance of Stress-testing and Precautionary Measures
Das stressed the importance of stress-testing for banks and NBFCs, emphasizing that while there may not be an immediate cause for worry at present, it is essential for financial institutions to remain proactive. He recommended taking necessary precautionary measures to stay ahead of potential risks.
RBI’s Efforts to Curb Unsecured Credit Growth
Das’s speech follows the RBI’s recent decision to increase risk weights on consumer loans and loans to NBFCs in an effort to slow down the rapid growth of unsecured credit. The central bank has been actively warning lenders about the risks associated with unchecked credit expansion. In his speech, Das reassured that these measures are targeted and pre-emptive.
Concerns Regarding Credit Growth
Das outlined four significant areas of concern related to credit growth: sustainability, bank-NBFC links, microfinance institutions (MFIs) loan pricing, and overreliance on analytics.
Sustainable Growth at All Levels
While credit growth is accelerating, financial institutions need to ensure that the overall, sectoral, and sub-sectoral levels of growth remain sustainable. Lenders should strengthen their asset liability management and focus on balancing their liabilities side. Das also highlighted the need to be cautious of increased reliance on high-cost, short-term bulk deposits while the tenure of loans, both in retail and corporate sectors, is lengthening.
Interconnectedness of NBFCs and Banks
Das drew attention to the increasing importance of NBFCs and their close interconnectedness with banks. NBFCs are significant borrowers from the financial system, with banks having the highest exposure to them. Banks are also key buyers of the debentures and commercial papers issued by NBFCs, and NBFCs maintain borrowing relationships with multiple banks simultaneously. This interconnectedness poses a potential contagion risk, and Das recommended that banks must constantly evaluate their exposure to NBFCs and the exposure of individual NBFCs to multiple banks. Additionally, NBFCs should diversify their funding sources to reduce overdependence on bank funding.
Responsible Loan Pricing by MFIs
Highlighting the need for responsible lending to marginalized clientele, Das pointed out the importance of microfinance institutions (MFIs) judiciously using their freedom to price loans. While the RBI has removed pricing caps on small loans given by NBFC-MFIs to allow greater flexibility in setting lending rates, Das cautioned against unreasonably high net interest margins and emphasized the importance of transparent and fair interest rates that are affordable for borrowers.
Risks of Model-based Lending through Analytics
Das warned lenders against excessive reliance on risk models of tech-driven entities in lending collaborations. While collaboration with fintechs allows for innovative products and services, the governor stressed the necessity of close attention when it comes to model-based lending through analytics. Lenders should exercise caution and not solely rely on preset algorithms. Das emphasized the importance of robust and periodically tested models, highlighting the risks associated with potential information gaps that may lead to dilution of underwriting standards and expose the system to undue risk build-up.
In conclusion, RBI governor Shaktikanta Das has highlighted several concerns related to lending practices and fintech models, urging financial institutions to exercise prudence and take necessary precautions to ensure sustainable growth, manage risk exposures, and promote fair and responsible lending practices.
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