The Reserve Bank of India (RBI) issued a fresh warning to non-banking financial companies (NBFCs) in Mumbai on Monday, urging them to tighten their underwriting processes and monitor risks more closely. This marks the third such caution from the central bank in just eight days, highlighting growing regulatory concern over the sector's stability.
RBI's Directives to NBFC Leadership
The RBI convened a meeting with the managing directors and chief executive officers of select NBFCs. This group included government-owned NBFCs, housing finance companies, and microfinance institutions. The RBI Governor emphasized the crucial role NBFCs play in transmitting credit across the economy. However, he stressed that this must be balanced with robust risk management.
The central bank's key directives were clear. NBFCs must maintain sound underwriting standards and keep a close watch on asset quality. They were also instructed to follow customer-centric and ethical practices, ensure responsible lending, and provide prompt grievance redressal mechanisms. The RBI stated that these measures are essential to preserve public confidence and support orderly growth in the financial sector.
Risks Highlighted in Stability Reports
The meeting served to underline significant risks that had been previously flagged in two major RBI publications: the Trend and Progress of Banking report and the Financial Stability Report (FSR).
The FSR, released on December 31, pinpointed funding dependence as a core vulnerability for NBFCs. The report warned that NBFCs remain heavily reliant on bank borrowings, creating potential contagion risks between the two interconnected sectors. This means trouble in the NBFC sector could quickly spill over to banks.
Another rising concern is concentration risk. Banks are now acquiring nearly 80% of securitised assets from a limited set of NBFCs. This creates a "correlated risk" scenario where financial stress at a few large NBFC originators could simultaneously impact multiple banks.
Asset Quality and Fintech-Led Lending Under Scrutiny
The report presented a mixed picture on asset quality. While some segments show improvement, others like microfinance continue to exhibit signs of stress. A particular area drawing regulatory scrutiny is the rapid growth in fintech-led unsecured personal loans.
Fintech firms have seen explosive growth in unsecured personal loans, but higher impairment is observed in small-ticket loans (up to Rs 50,000). The risk is notably elevated among borrowers who have taken loans from multiple lenders. The report specified that impairments were relatively higher in small-ticket loans and among borrowers with unsecured loans from five or more lenders.
The RBI's repeated interventions signal a proactive stance to prevent systemic risks. The message to NBFCs is unambiguous: prioritize stability, enhance governance, and manage the risks associated with aggressive growth, especially in the unsecured lending space.
