Investors pushing some NBFCs to grow fast; unsustainable practices will invite action: RBI

Mumbai: The Reserve Bank on Wednesday said it has come across instances of investors pushing some non-banking finance companies (NBFCs) to grow aggressively, which is leading to inappropriate business practices.

Flagging risks like poor customer service, entities' own finances coming under strain and even a possible dent to financial stability through such practices, Governor Shaktikanta Das warned that the RBI will "not hesitate" to take action against errant entities if they continue to follow such practices.

Das made it clear that the risk is not at a systemic level and it is only a few entities where the RBI has observed certain issues.

"...driven by the significant accretion to their capital from both domestic and overseas sources, and sometimes under pressure from their investors, some NBFCs -- including microfinance institutions (MFIs) and housing finance companies (HFCs) -- are chasing excessive returns on their equity," he said.

Such tendencies are leading to practices such as unreasonably high processing fees and frivolous penalties, he said, adding that the same is further accentuated by what appears to be a 'push effect', wherein business targets are driving retail credit growth rather than actual demand.

"The consequent high-cost and high indebtedness could pose financial stability risks, if not addressed by these NBFCs," Das said.

It is essential for entities to follow sustainable lending practices, a compliance first culture, strong risk management and be sincere on addressing customer grievances, he said.

"The Reserve Bank is closely monitoring these areas and will not hesitate to take appropriate action, if necessary," Das said, adding that the central bank will desire a self-correction by NBFCs.

Deputy Governor Swaminathan J said the strong messaging is aimed both at select set of errant NBFCs and also segments where the practices are doubtful and added that there are instances of elevated slippages and higher credit costs in both.

Das was, however, non-committal when asked if higher risk weights -- a strategy adopted by the RBI to curb lending in a particular segment -- are on its way for the non-banks.

In June 2024, Das had spoken about usurious interest rates being charged by MFIs and asked the industry players to relook into the practices. On Wednesday, he seems to have had broadened the funnel and issued the stern message to the NBFC sector as a whole.

Some NBFCs are aggressively pursuing growth without building up sustainable business practices and risk management frameworks, commensurate with the scale and complexity of their portfolio, Das said.

"An imprudent 'growth at any cost' approach would be counter productive for their own health," he added.

He also asked the NBFCs to review their prevailing compensation practices, variable pay and incentive structures, some of which appear to be purely target driven in certain NBFCs, stating that this may lead to 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.

Reacting to the comments from the RBI, non-bank lender Capri Global Capital's managing director Rajesh Sharma said the suggestions are "timely and relevant" because the country is stepping into another few quarters of high growth, which requires financial stability to be maintained.