Growth at any cost approach of some NBFCs would be counterproductive: Das
Oct 9, 2024
Das directed NBFCs to review their prevailing compensation practices, variable pay, and incentive structures
In a stern message to non-banking finance companies (NBFCs) aggressively pursuing growth without sustainable business practices and robust risk management frameworks, Reserve Bank of India (RBI) governor Shaktikanta Das warned on Wednesday that a "growth at any cost" approach would be counterproductive for their health.
He highlighted that some NBFCs, including microfinance institutions (MFIs) and housing finance companies (HFCs), driven by their capital strength and under pressure from investors, are chasing excessive returns on 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 are combined with unreasonably high processing fees and frivolous penalties,” Das said.
“These practices are sometimes further accentuated by what appears to be a ‘push effect’, as business targets drive retail credit growth rather than actual demand. The consequent high costs and high indebtedness could pose financial stability risks if not addressed by these NBFCs,” he added.
Additionally, Das directed NBFCs to review their prevailing compensation practices, variable pay, and incentive structures, as some appear to be purely target-driven in certain NBFCs. “Such practices may result in an adverse work culture and poor customer service,” he said.
He further instructed NBFCs, including MFIs and HFCs, to follow sustainable business goals, adopt a ‘compliance first’ culture, implement a strong risk management framework, strictly adhere to the fair practices code, and sincerely address customer grievances.
“The Reserve Bank is closely monitoring these areas and will not hesitate to take appropriate action if necessary. However, self-correction by the NBFCs would be the preferred option,” Das warned.
Meanwhile, he also highlighted the buildup of stress in a few unsecured loan segments such as loans for consumption purposes, microfinance loans, and credit card outstandings.
“The Reserve Bank is closely monitoring the incoming information and will take measures as may be considered necessary,” Das said.
“Banks and NBFCs, on their part, need to carefully assess their individual exposures in these areas, both in terms of size and quality. Their underwriting standards and post-sanction monitoring must be robust. Continued attention also needs to be given to potential risks from inoperative deposit accounts, the cybersecurity landscape, mule accounts, etc.,” he added.
[The Business Standard]
