Speaking at an event co-hosted by FICCI and the Indian Banks’ Association, Das highlighted the importance of stress testing, sustainable credit growth, and vigilant asset-liability management.

“At the current juncture there may not be any immediate cause for worry, but to remain on top of things, banks and NBFCs would be well advised to take certain precautionary measures,” the governor said.

He outlined four key areas of focus: maintaining sustainable credit growth, enhancing asset-liability management, monitoring the interconnectedness of banks and NBFCs, and ensuring that microfinance institutions (MFIs) price loans judiciously.

“In certain cases, we have observed increased reliance on high-cost short-term bulk deposits while the tenure of the loans, both in retail and corporate loans, is getting elongated,” he said.

NBFCs are large net borrowers of funds from the financial system, with their exposure from the banks being the highest. That apart, banks are also one of the key subscribers to the debentures and commercial papers issued by NBFCs, he said, adding that NBFCs also maintain borrowing relationships with multiple banks simultaneously.

“Needless to state that such concentrated linkages may create a contagion risk. Though the banks are well capitalised, they must constantly evaluate their exposure to NBFCs and the exposure of individual NBFCs to multiple banks,” he said.

NBFCs, he said, must broadbase their funding sources and reduce overdependence on bank funding.

As MFIs are catering to the marginalised clientele, they have to bear in mind the affordability and repayment capacity of the borrowers, Das said. Last year in March, RBI removed pricing caps on small loans given by non-banking financial company-microfinance institutions, allowing greater flexibility to set lending rates.

“Though the interest rates are deregulated, certain NBFCs-MFIs appear to be enjoying relatively higher net interest margins. They are expected to ensure that interest rates are transparent and not usurious,” he said.

Das also cautioned lenders against too much reliance on the risk models of these tech-driven entities under lending collaborations. He said that although increased collaboration of banks and NBFCs with fintechs is allowing introduction of innovative products and services, model-based lending through analytics requires close attention. 

Lenders, he said, need to be careful in relying solely on pre-set algorithms as assumptions based on which the lending models are operated.

“These models should be robust and tested and re-tested periodically. It is necessary to be watchful of any undue risk build up in the system due to information gaps in these models, which may cause dilution of underwriting standards,” said Das.

Milestone Alert!Livemint tops charts as the fastest growing news website in the world 🌏 Click here to know more.

Updated: 22 Nov 2023, 01:42 PM IST