Reserve Bank of India (RBI) Governor Shaktikanta Das on Thursday issued a warning to some Non-Banking Finance Companies (NBFCs) which are seen pursuing aggressive growth without building up sustainable business practices and risk management frameworks commensurate with the scale and complexity of their portfolio. 

“An imprudent ‘growth at any cost’ approach would be counter productive for their own health,” Mr. Das said in his monetary policy statement.

He said 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 they charge become usurious and get combined with unreasonably high processing fees and frivolous penalties,” he said. 

“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,” he added.

Stating that while the overall NBFC sector remains healthy, he said the outliers must review their prevailing compensation practices, variable pay and incentive structures some of which appear to be purely target driven in certain NBFCs. 

“Such practices may result in adverse work culture and poor customer service,” Mr Das said.

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

He said the RBI 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 cautioned.

Later at a press conference Mr. Das said, “The push effect is confined to certain NBFCs. I am not generalising for the whole NBFC sector. It is clear that the overall NBFC sector is doing well, remaining stable and in good health.”

Further explaining, Deputy Governor Swaminathan J said, “This particular messaging is for the set of players.”

Emphasising the on likelihood of stress buildup in a few unsecured loan segments like loans for consumption purposes, micro finance loans and credit card outstandings, Mr Das said the RBI 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 exposures in these areas, both in terms of size and quality. Their underwriting standards and post-sanction monitoring have to be robust,” he said.

“Continued attention also needs to be given to potential risks from inoperative deposit accounts, cybersecurity landscape and mule accounts,” he added.