(Bloomberg) -- India’s central bank warned shadow banks to put in place robust risk mitigating systems like assessing credit worthiness of individual borrowers in a more comprehensive manner, failing which it might have to step in and take regulatory action.
Describing most of the lenders as healthy, Governor Shaktikanta Das, said some of them were “outliers” and urged these firms to assess their exposures so that there is no build up of stress especially in the unsecured loans business. He also called for a review of the compensation structures in some of these finance companies, which he said could lead to an adverse work culture and poor customer service.
In addition, their underwriting standards and post-sanction monitoring have to be robust, Das said on Wednesday, while presenting the monetary policy statement. Das added banks and shadow lenders also need to pay attention to “inoperative deposit accounts, cyber-security landscape, mule accounts and a few other factors which we have been stressing and highlighting time and again.”
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While shadow banks or non-banking finance companies as they are called, have grown in the last few years boosting credit flows and aiding financial inclusion, there are some concerns that are building up. Some of these “outlier” shadow banks are aggressively pursuing growth without building up sustainable business practices and risk management frameworks commensurate with the scale and complexity of their portfolios, Das said.
“An imprudent, growth-at-any-cost approach would be counterproductive for their own health,” Das said.
Under pressure from their investors, some NBFCs, including micro-finance institutions and housing finance companies, are chasing “excessive returns on their equity,” Das said.
“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,” Das said. He added these activities were sometimes accentuated by an effort to meet business targets and drive retail growth rather than address actual demand.
“The consequent high cost and high indebtedness could pose financial stability risks if not addressed by these NBFCs in time,” Das said.
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