While delivering his monetary policy speech on October 9, RBI Governor Shaktikanta Das noted that with some non-bank finance companies (NBFCs), it seems apparent that business targets are driving retail credit growth, rather than the actual demand. He made a strong case for dissuading such "push effects".
Das noted that the health of banks and non-banks remain stable. “There has been some recent commentary on the likelihood of stress build-up in some unsecured loan segments like loans for consumption purposes, micro finance and credit cards. The Reserve Bank is closely monitoring the incoming information and will take measures, as may be considered necessary. Banks and NBFCs, on their part, need to carefully assess their individual exposure in these areas, both in terms of size and quality,” he said.
Referring to non-bank lenders, he talked of observations on their growth and compensation packages. “While the overall NBFC sector remains healthy, I have a few messages to the outliers,” he specified, elaborating that a few NBFCs may be aggressively chasing growth without building sustainable business practices and risk management framework commensurate scale, and complexities of their portfolios. “An imprudent ‘growth at any cost’ approach would be counter-productive for their own health,” Das cautioned.
A chief executive of a mid-sized diversified NBFC acknowledged that this messaging is already out clearly by the Bank of India in some of the messaging to a few NBFCs. “The popular notion is that NBFCs have a better runway to price the risk and hence most of us end up ignoring many of the risks because we feel it is all priced in the rate. That approach will have to go for a serious rethink,” he said.
This was also the first time that the Governor pointed out that the chasing growth at any cost could pose financial stability risk. "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. The consequent high-cost and high indebtedness could pose financial
stability risks, if not addressed by these NBFCs".
Several NBFCs have been facing stringent regulatory action for a while. In fact, the ban on Bajaj Finance was recently lifted by the regulator and so is the case with IIFL Finance as well. Set another non-bank, such as JM Financial and Edelweiss are still faced with restrictions from carrying out certain businesses.
Stocks of listed NBFC, however, remained undisturbed by this warning from the RBI.
The October MPC speech was also the first time when the governor made an explicit mention of compensation packages of NBFCs. “The NBFC is may review their prevailing compensation practices, variable pay and incentive structures, some of which appears to be purely target driven in certain NBFCs. Such practices may result in adverse work culture and poor customer service,” Das said.
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