NBFCs Must Monitor Peer-To-Peer Lending and Uphold Underwriting Standards, Stresses RBI Deputy Governor
Rajeshwar Rao, Deputy Governor of the Reserve Bank of India, emphasizes the urgent need for non-banking finance companies (NBFCs) to scrutinize their peer-to-peer lending practices and uphold underwriting standards, during a speech at a Confederation of Indian Industries event.
Warning against Compromised Underwriting Standards
According to Rao, NBFCs must be vigilant in maintaining rigorous underwriting standards. Any compromise in this key area of lending could precipitate significant risks, especially with companies increasingly focusing their lending portfolios on particular segments. As a cautionary signal for ‘NBFCs must watch peer-to-peer lending, underwriting standards,’ Rao emphasizes the importance of striking a balance between operational expediency and risk management.
The Perils of Non-Regulation Compliant P2P Lending Practices
Rao raises significant concerns regarding peer-to-peer (P2P) lending activities of select NBFCs, which he discerns are counter to regulatory norms. He observes that these NBFCs often downplay inherent risks through a variety of avenues, such as offering inflated guarantees on returns, complex structuring of transactions, or offering unwarranted assurance of funds recall facilities at any time.
Rao undercuts these practices with a stark reminder to the industry that violations of licensing conditions and flouting of regulatory guidance are unacceptable. This statement reiterates the gravity and importance of the mantra ‘NBFCs must watch peer-to-peer lending, underwriting standards.’
Prioritizing Portfolio Quality Over Rapid Expansion
Rao also urges NBFCs not to sacrifice loan portfolio quality in the pursuit of rapid growth. He identifies a tendency among NBFCs to adopt oversimplified underwriting processes to accommodate more customers. While ease of operation and customer convenience are important, he warns that these should not be achieved at the cost of stringent underwriting standards.
The Risks of Over Concentration in Lending Portfolios
Furthermore, Rao advises NBFCs to avoid portfolio concentration risks. Overexposure to a single sector, such as consumer loans, can lead to increased vulnerability. He urges company boards to actively monitor such risks and emphasize that recognizing, understanding, and addressing these risks serve their self-interest.
Microfinance Companies and Disproportionate Margins
An apparent disparity in margins within the microfinance segment has garnered attention as well. Rao notes that some microfinance institutions (MFIs) have inflated their margins disproportionately under the new regulatory framework. He asserts that while quick implementation of increases in costs onto borrowers has been observed, the distribution of benefits envisioned within this framework remains sluggish.
The RBI is cognizant of this misuse of freedom within the microfinance sector. Rao assures that irresponsible practices will not go unnoticed or unaddressed.
Considering Deposit Acceptance in NBFCs
Rao touches upon the delicate issue of permitting NBFCs to accept deposits. He explains that non-acceptance of deposits currently offers a degree of regulatory comfort. This stance allows the RBI to maintain lower entry barriers and exit barriers for NBFCs while giving them the flexibility to specialize in sectors of their choice.
However, deposit acceptance would entail a comprehensive macro financial safety net. It would entail deposit insurance, a central bank liquidity backstop, increased regulatory rigor, and enhanced supervisory oversight. These changes could uproot the niche specialization and functionality of NBFCs, which Rao acknowledges, goes against their unique characteristic.
In conclusion, the ‘NBFCs must watch peer-to-peer lending, underwriting standards’ directive from RBI’s Deputy Governor echoes a clarion call to the industry. It urges self-regulation, rigorous underwriting standards, calculated risk response strategies, and transparency in operations. With these guiding principles in place, NBFCs can contribute responsibly and effectively to India’s financial stability and economic growth.
