Even as the overall health of non-banking finance companies (NBFCs) remains strong, the Reserve Bank of India (RBI) has observed that some NBFCs are aggressively pursuing growth without building up sustainable business practices and risk management frameworks, RBI Governor Shaktikanta Das said in his Monetary Policy Committee (MPC) statement today.

“An imprudent ‘growth at any cost’ approach would be counter productive for their own health,” Das, said. He also flagged that driven by the significant accretion to their capital from both domestic and overseas sources, and sometimes under pressure from their investors, some NBFCs – including microfinance institutions (MFIs) and housing finance companies (HFCs) – are chasing excessive returns on their equity.

While such pursuits are in the domain of the boards and managements of NBFCs, concerns arise when the interest rates charged by them become usurious and get combined with unreasonably high processing fees and frivolous penalties.

“These practices are sometimes further accentuated by what appears to be a ‘push effect’, as business targets drive retail credit growth rather than its actual demand. The consequent high-cost and high indebtedness could pose financial stability risks, if not addressed by these NBFCs,” Das said.

Further, he said that NBFCs may review their prevailing compensation practices, variable pay and incentive structures as some of these practises appear to be purely target driven in certain NBFCs. Such practices could result in adverse work culture and poor customer service.

Das said it is important that NBFCs, including MFIs and HFCs, follow sustainable business goals, ‘compliance first’ culture, a strong risk management framework, strict adherence to fair practices code and sincere approach to customer grievances.

“The Reserve Bank is closely monitoring these areas and will not hesitate to take appropriate action, if necessary. Self-correction by the NBFCs would, however, be the desired option,” he said.

Das also said that recent commentary on likelihood of stress building up in a few unsecured loan segments like loans for consumption purposes, micro finance loans and credit card outstanding is being monitored by the RBI. The regulator, Das says, will take measures, as may be considered necessary to counter the issues. Banks and NBFCs, on their part, need to carefully assess their individual exposures in these areas, both in terms of size and quality.

Continued attention also needs to be given to potential risks from inoperative deposit accounts, cybersecurity landscape, mule accounts, Das said.

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