Reserve Bank of India (RBI) Governor Shaktikanta Das on Friday said that the proliferation of non-bank institutions in financial intermediation may create risks to financial stability due to their size, complexity and interconnectedness with the domestic and global financial systems. 

“In recent years, a number of vulnerabilities have emerged in NBFIs in advanced economies, contributing to periods of market dysfunction. Hidden leverage and liquidity mismatches of these institutions can amplify shocks and propagate strains throughout the financial system,” he said. 

He was speaking on Global Financial Stability; Risks and Opportunities at the Future of Finance Forum 2024 organised by the Bretton Woods Committee, Singapore.

Flagging another risk, Mr. Das said private credit, which had grown fourfold over the last 10 years, had now emerged as a major source of corporate financing among middle-market firms that have low or negative earnings, high leverage, and lack high-quality collateral. 

“Proliferation of this asset class, along with intensifying competition with investment banks on larger deals, may shift supply-demand dynamics and result in poorer underwriting standards “ he said. 

“ As a consequence, the probability of credit losses can rise and make existing risk management models obsolete. The rapid growth of private credit, their increasing interconnectedness with banks and NBFIs, and their opacity creates vulnerabilities that could become systemic,” he added. 

Regulators world over need to give a closer look at these developments and come out with necessary guardrails, he suggested. 

Emphasising on the stress in the global commercial real estate (CRE) sector which needs to be watched closely, the Governor said banks were seen exhibiting high sensitivity to expected and unexpected CRE losses, due to the relatively high CRE coverage ratios in their loan books.

“Further, liquidity squeezes can materialise for banks with large CRE exposures, as short sellers may target them and investor confidence may slip further. As I said earlier, staying alert and undertaking forward looking regulatory measures ahead of the curve can contain the risks to bank balance sheets and systemic stability,” he said.