RBI Governor Shaktikanta Das has shot off yet another warning to non-banking financial companies (NBFCs) on their aggressive and unsustainable growth practices. According to Das, some shadow banks were charging interest rates bordering on the usurious, which, if left unchecked, could lead to severe consequences like excessive indebtedness for borrowers. It could even threaten the overall financial stability. So Das urged both banks and NBFCs to carefully assess their exposures, particularly in unsecured lending segments like gold and personal loans. He reasoned that self-correction was the only desired option for all those entities that have been prioritising business growth over prudence. Failing to do so will see the wrath of the regulator, which has already begun penalising erring players. In March, the RBI had barred JM Financial Products and IIFL from doing business for failing to comply with good lending practices.
RBI's repeated concerns also stem from the fact that too many borrowed bucks were flowing into the equity market, especially in the risky futures and options segment. JM Financial was penalised for serious deficiencies including sanctioning and disbursing of loans against initial public offerings and debenture subscriptions. Concerns have also been raised on the likelihood of a stress build-up in unsecured segments like loans for consumption and credit card spending. The regulator had earlier warned players to remain vigilant against algorithm-driven lending models that swiftly generate approvals for personal loans without appropriate due diligence.
While on one side, NBFCs are turning in impressive growth rates, policy makers believe that much of this is coming on the back of improper risk management and unsustainable business practices. For now, the sector appears healthy; but if NBFCs, microfinance institutions and housing finance companies continue to pursue the ‘growth at any cost’ approach, focusing solely on return on equity, it may not end well. Rating agency ICRA has already sounded the bugle, stating that NBFCs will likely see their gross bad loans rising 30-50 basis points during the current fiscal, from 2.8 percent in 2023-24. It added that the steep credit expansion in retail asset segments in the last two fiscals will likely reflect in their 2024-25 performance. For the sake of stability, the companies should cut back on unsecured loans and focus on improving asset quality.
