RBI deputy governor urges banks to be prudent on lending to NBFCs
Mumbai: Banks need to reconsider whether they want to be part of lending consortiums to non-bank financiers that have scores of other lenders – up to 40 at times – to improve their monitoring of borrowers’ use of sanctioned loans, RBI deputy governor Swaminathan J said.
“By regulation if I say that a non-banking financial company (NBFC) should not borrow from more than 10 banks, it will be very prescriptive and restrictive and that is not something which will solve the problem. Lenders as a group should take a call on what should be the way going forward so that they have good underwriting standards as well as good post-sanction monitoring,” Swaminathan said at SBI’s banking and economics conclave.
The deputy RBI governor was responding to a question from SBI managing director Ashwini Tewari, who pointed out that certain NBFCs have a large number of banks, non-banks and even fintech firms as lenders.
Swaminathan said that RBI governor Shaktikanta Das met the heads of large banks and non-bank lenders in July and August, and raised the issue of interconnectedness and banks becoming the largest source of funds for NBFCs. The issue of interconnectedness was also mentioned in the RBI’s Report on Trends and Progress of Banking in India, released on Wednesday.
“We have also noticed that the lender group is consisting of 20-40 lenders. If you ask the not-so-well-rated NBFCs, their answer is that banks do not want to take big limits and are willing to give only small exposure limits because of their own constraints. If you ask the well-rated NBFCs, they say we have all these limits in place but we will draw down (utilise) from whoever quotes the best price,” said Swaminathan.
He said banks also do not want to feel left out and therefore look to be part of several lender groups. He added that it is becoming a lose-lose game for everyone since risk is not monitored at the underwriting stage because of the large number of lenders to a particular NBFC, and post-sanction monitoring suffers too, since all lenders think the others will take care of it.
In November the RBI increased risk weights on bank loans to NBFCs and on unsecured loans that NBFCs disburse, by 25 percentage points each. This makes loans more expensive as it requires banks to set aside more capital for safety, prompting them to pass on the increased credit cost to customers.
On high growth in loans to NBFCs, Swaminathan said this has been a trend for the past two to three years. “A huge interconnectedness gets built up when banks are financing an entity which is in the same sector, (and) which is likely to pose a contagion risk. It is not that we have seen something alarming in terms of the indicators, they are all fine at this point,” he said.
He said that RBI does not want an “extraordinary interconnectedness” building up and posing a contagion risk, and has thus brought in certain measures to curtail exuberance.
The deputy governor also advised banks to build adequate risk buffers in good times so that both expected and unexpected losses could be absorbed.
“Strengthen your risk management functions and give them a free hand in terms of validating the business models that we pursue so that any inherent risk building up in an existing or new product is understood in advance,” he said. He also urged banks to “invest in technology as if there is no tomorrow”.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it’s all here, just a click away! Login Now!
Download The Mint News App to get Daily Market Updates.
Published: 28 Dec 2023, 01:35 PM IST
