RBI Governor warns NBFCs against pursuing unsustainable practices to push growth

Mumbai: RBI Governor Shaktikanta Das on Wednesday warned of action against those non-banking financial companies (NBFCs) who are pursuing unsustainable practices to push growth.

In a strongly-worded statement while announcing the bi-monthly policy review, Das asked such NBFCs to be sincere, fair and follow sustainable practices.

"It is important that NBFCs, including MFIs (microfinance institutions) and HFCs (housing finance companies), 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," Das said.

"The Reserve Bank is closely monitoring these areas and will not hesitate to take appropriate action, if necessary," he warned adding that the RBI wants NBFCs to undertake "self-correction".

The NBFC segment has registered an "impressive growth" over the last few years, Das said, acknowledging that such lenders have helped the policy objective of financial inclusion.

However, some NBFCs are pursuing growth aggressively without building up sustainable business practices and risk management frameworks, he rued.

"An imprudent 'growth at any cost' approach would be counter productive for their own health," the Governor said.

Having raised capital from domestic and foreign sources, some entities are chasing excessive returns on their equity, he said, pointing out that concern arises when the interest rates become usurious and get combined with unreasonably high processing fees and frivolous penalties.

Moreover, there is a "push effect", wherein "business targets drive retail credit growth rather than its actual demand", Das said, fearing that this may also pose a financial stability risk because of high cost and high indebtedness.

He also asked the entities to review their staff compensation practices, variable pays and incentive structures, noting that some of it appears to be purely target-driven and may result in adverse work culture and poor customer service.

Das also made it clear that the health parameters of banks and NBFCs continue to be "strong" even as there has been some commentary of stress build-up in unsecured segments.

He asked banks and NBFCs to carefully assess their individual exposures in these areas, both in terms of size and quality, and have robust underwriting and monitoring of loans.