The Reserve Bank of India (RBI) Governor has urged Non-Banking Financial Companies (NBFCs) to strictly adhere to the Fair Practices Code, emphasizing sustainable growth and robust risk management in the sector.
Speaking during the Monetary Policy announcement, the Governor highlighted that while the health parameters of both banks and NBFCs remain strong, there are emerging concerns in specific unsecured loan segments, including loans for consumption, microfinance, and credit card outstandings. The RBI is actively monitoring these areas and is prepared to take necessary measures if needed.
It is observed that some NBFCs are aggressively pursuing 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 counterproductive for their own health,” Das stated.
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. 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.
Hence, 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 Reserve Bank 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,” Das added.
