The Reserve Bank of India (RBI) has flagged potential risks and challenges in the financial sector, including banks taking greater recourse to liabilities such as bulk deposits to meet incremental credit demand, certain segments of personal loans continuing to witness high growth despite an increase in risk-weights, and top-up loans growing at a brisk pace.
“The Indian financial system remains resilient and is gaining strength from broader macroeconomic stability. Its well-capitalised and unclogged balance sheet is reflective of higher risk absorption capacity.
....Even in such stable financial sector conditions, the emphasis cannot shift away from proactive identification of potential risks and challenges, if any,” Governor Shaktikanta Das said.
He noted that alternative investment avenues are becoming more attractive to retail customers, and banks are facing challenges on the funding front, with deposits trailing loan growth.
As a result, banks are relying on short-term non-retail deposits and other liability instruments to meet the incremental credit demand.
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“This...may potentially expose the banking system to structural liquidity issues,” cautioned Das.
He suggested that banks may, therefore, focus more on mobilisation of household financial savings through innovative products and service offerings, and by fully leveraging their vast branch network.
Referring to the RBI’s increase in risk weights on unsecured consumer credit and bank credit to NBFCs in November 2023 to pre-empt build-up of any potential risk in these segments, Das noted that certain segments of personal loans continue to witness high growth.
“Excess leverage through retail loans, mostly for consumption purposes, needs careful monitoring from a macro-prudential point of view. It calls for careful assessment and calibration of underwriting standards, as may be required, as well as post-sanction monitoring of such loans,” he said.
Consequent to the increase in risk weights, credit growth in unsecured personal loans, such as ‘credit card outstanding’, declined from 34.2 per cent in November 2023 to 23 per cent in April 2024, while bank credit growth to NBFCs declined from 18.5 per cent in November 2023 to 14.4 per cent in April 2024.
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Top-up loans: LTV concerns
Das said home equity loans, or top-up housing loans, which have been growing at a brisk pace, are also attracting the RBI’s attention.
Banks and NBFCs have also been offering top-up loans on other collateralised loans, such as gold loans..
“It is noticed that the regulatory prescriptions relating to loan-to-value (LTV) ratio, risk weights, and monitoring of the end use of funds are not being strictly adhered to by certain entities. I repeat, certain entities,” the Governor said.
He cautioned that such practices may lead to loaned funds being deployed in unproductive segments or for speculative purposes. Banks and NBFCs would, therefore, be well-advised to review these practices and take remedial action.
Referring to the unprecedented IT outage globally last month, which affected businesses in many countries, Das said the outage demonstrated how a minor technical change, if it goes haywire, can wreak havoc on a global scale.
It also highlighted the fast-growing dependence on big tech companies and third-party technology solution providers.
“In this context, it is necessary for banks and financial institutions to build appropriate risk management frameworks for their IT, cybersecurity, and third-party outsourcing arrangements to maintain operational resilience. The Reserve Bank has time and again emphasised the importance of robust business continuity plans (BCP) to deal with such incidents,” Das said.