The Reserve Bank of India (RBI) has issued a stern warning to shadow banks, urging them to implement robust risk mitigation systems and improve their creditworthiness assessments. Failure to do so, the central bank warned, could lead to regulatory intervention, Bloomberg reports.
In his monetary policy statement on Wednesday, RBI Governor Shaktikanta Das acknowledged the healthy state of most shadow banks or Non-Banking Finance Companies (NBFCs). However, he expressed concern over a few “outliers” that are aggressively pursuing growth without prioritizing sustainable business practices and adequate risk management frameworks.
While such pursuits are in the domain of the boards and management of NBFCs, concerns arise when interest rates charged by them become usurious and get combined with unreasonably high processing fees and frivolous penalties, according to Das. He pointed out that these practices, often driven by a desire to meet business targets and drive retail growth, could lead to high cost and indebtedness, posing financial stability risks.
The RBI Governor specifically called for shadow banks to:
• Enhance creditworthiness assessments: More comprehensive assessments of individual borrowers are essential.
• Review compensation structures: Current structures in some NBFCs may incentivize undesirable work culture and poor customer service.
• Strengthen underwriting standards and post-sanction monitoring.
• Address concerns related to inoperative deposit accounts, cybersecurity, mule accounts, and other vulnerabilities.
Das stressed the need for shadow banks to address these concerns proactively to ensure the stability of the financial system. While these entities play a crucial role in boosting credit flows and promoting financial inclusion, unchecked growth without proper risk management could have detrimental consequences.
