Reserve Bank of India (RBI) Governor Shaktikanta Das.
| Photo Credit: ANI

Banks and NBFCs must take care to ensure that the vital pursuit of growth does not end up in an embrace of unacceptable risks, which could undermine both the institution and overall financial stability, Reserve Bank of India (RBI) Governor Shaktikanta Das observed on Thursday.

“While business models may be designed to drive profitability and growth, they sometimes contain vulnerabilities that may not be apparent,” Mr. Das said in his address at the second global conference on Financial Resilience organised by College of Supervisors, RBI, Mumbai. “Pursuit of business growth is important, but it should never come at the expense of taking on unacceptable risks. Robust risk mitigants are essential for ensuring long-term success and resilience of a regulated entity as well as the overall financial system,” he stressed.

Emphasising that the RBI had significantly strengthened its supervisory systems, transitioning beyond an entity-focused approach to a more thematic and activity-based approach, he said the central bank now looked at the sustainability of business models of banks and NBFCs.

“Root cause analysis of problems and vulnerabilities are undertaken. Advance action is initiated wherever we notice or smell a crisis,” he said.

Stating that in November the RBI had imposed regulatory restrictions on unsecured retail lending and on a few other aspects, he said though the headline numbers and parameters were looking good at the time, “we thought it’s better to act in advance and slow down the credit growth, which was happening in these segments”. “We could clearly see some evidence of dilution of underwriting standards, proper appraisal not being done and there was a mentality to join the bandwagon, go for unsecured credit,” he explained.

“I am happy to report that our timely action has resulted in a situation where the growth of unsecured loans, which was in the order of 30% year-on-year has come down to about 23%. Similarly, banks lending to NBFCs, which was also about 29-30%, has come down to about 18%. So therefore, supervisors have a very important role to play here,” Mr. Das added.

He said the RBI would continue to fine-tune the regulatory architecture and the supervisory rigour, as may be required, to promote long-term resilience and stability of the financial system.