look news india
New Delhi: Reserve Bank Deputy Governor Swaminathan J has warned that heavy reliance on unsecured loans and capital market funding could spell trouble for non-bank lenders in the long run.
Addressing heads of assurance operations of non-bank finance companies at a conference organized by the RBI, it warned against excessive reliance on algorithms for lending.
He also made public the RBI's disappointment over the tendency for “misguided or foolish interpretation” of rules to lead to “violations of the rules” and described it as a “significant threat” to the integrity of the financial system.
Swaminathan J said that, for some products or sectors such as unsecured loans, the risk threshold is “too high” to be sustainable in the long run. It seems that most NBFCs are also interested in doing the same, such as retail loans, top up loans or capital market funding. Excessive dependence on such products may lead to suffering at some point.
After the Reserve Bank of India (RBI) increased the risk weight on unsecured loans to dissuade lenders from taking such risks, there was a flood of speculation by loanable funds in the capital markets, prompting the RBI to do the same.
On the issue of algorithm-based lending, he said many institutions are turning to rule-based credit engines to accelerate book growth.
RBI will take action
Speaking about the tendency to violate rules for personal gain, Swaminathan said such practices undermine regulatory effectiveness, compromising market stability and fairness.
Such practices undermine trust and confidence in the financial sector, potentially exposing consumers, investors and the broader economy to risks and vulnerabilities. He made it clear that RBI will not hesitate to initiate supervisory action as shown by the recent steps.
In recent times, the dominance of NBFCs has increased and now their contribution to bank credit is one-fourth compared to one-sixth in 2013.