RBI warns NBFCs against aggressive business growth, warns of action

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.

Self-correction by the NBFCs would, however, be the desired option, Das said. “It is important that NBFCs, including MFIs and HFCs, follow sustainable business goals, a ‘compliance first’ culture, a strong risk management framework, a strict adherence to fair practices code and a sincere approach to customer grievances,” Governor said.

Das said an imprudent ‘growth at any cost’ approach would be counterproductive for their own health.

While such pursuits are in the domain of the boards and managements of NBFCs, concerns arise when the interest rates charged by them become usurious and get combined with unreasonably high processing fees and frivolous penalties, Das said.

“These practices are sometimes further accentuated by what appears to be a ‘push effect’, as business targets drive retail credit growth rather than its actual demand. The consequent high-cost and high indebtedness could pose financial stability risks, if not addressed by these NBFCs,” Governor said.

Talking to reporters in the post policy conference, Das said that the push effect is confined to certain NBFCs only.

“I am not generalising for the whole sector. Overall, the sector remains stable and has good health,” he noted.

RBI Deputy Governor Swaminathan J said the advisory is for those NBFCs that are pursuing a high risk high growth strategy and also to certain segments which were likely to get into stress.

Das also asked NBFCs to review their prevailing compensation practices, variable pay and incentive structures, some of which appear to be purely target driven in certain NBFCs.

Such practices may result in adverse work culture and poor customer services, he added.