The recent mandate to increase risk weights for unsecured consumer loans by banks and NBFCs is a precautionary measure taken by the Reserve Bank of India (RBI) to ensure sustainable lending, Governor Shaktikanta Das said.

“We recently announced a few macro prudential measures in the overall interest of sustainability. These measures are pre-emptive in nature. They are calibrated and targeted,” Das said adding that it is important to note that the central bank excluded “major growth drivers” like housing, vehicle and MSME loans from these norms.

“We have excluded them because at the moment we don’t see a possibility of a build up of stress. I am not ruling out that possibility (of stress) but it was also a conscious decision to leave out certain sectors which are contributing to growth which also need to be sustained.”

Das was speaking at the FIBAC 2023 Conference organised jointly by Federation of Indian Chambers of Commerce and Industry (FICCI) and Indian Banks’ Association (IBA).

‘Identify risks’

RBI’s focus is on strengthening governance and assurance functions, ensuring effective risk management and robust lending practices, he said, adding that there the measure is not a “value judgement” on banks or their underwriting.

Even so, banks and NBFCs need to reflect and introspect as to where potential risks could possibly originate, further strengthen their risk management practices, stress test their balance sheets and build additional buffers.

“While credit growth is accelerating in the current period, banks and NBFCs may take due care to ensure that credit growth at the overall, sectoral and sub-sectoral levels remain sustainable and all forms of exuberance are avoided,” he said.

Further, lenders need to strengthen their asset liability management and give greater attention to their liabilities side given the increased reliance on high-cost, short-term bulk deposits even as the tenure of the loans — both retail and corporate — is getting elongated.

On watch

The increasing inter-connectedness between banks and NBFCs also merits close attention, Das said, adding that such “concentrated linkages” may create a contagion risk owing to which banks must constantly evaluate their exposure to NBFCs and the exposure of individual NBFCs to multiple banks. NBFCs, on their part, should focus on broad basing their funding sources and reducing over-dependence on bank funding.

With respect to fintech partnerships and model-based lending through analytics, Das warned that lenders must be wary about relying solely on pre-set algorithms and models, which too should be robust and tested periodically. This is required to be watchful of any undue risk build up in the system due to information gaps in these models, which may cause dilution of underwriting standards, he said.

Das also highlighted that after deregulation of rates for microfinance institutions (NBFC-MFIs), some entities “appear to be enjoying relatively higher net interest margins”.

“It is indeed for micro finance lenders to ensure that the flexibility provided to them in setting interest rates is used judiciously. They are expected to ensure that interest rates are transparent and not usurious,” he said.

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