Reserve Bank of India Governor Shaktikanta Das on Wednesday advised banks and non-banking finance companies (NBFCs) to maintain a sustainable level of credit growth and avoid 'all forms of exuberance'. Speaking at a banking event organised jointly by Federation of Indian Chambers of Commerce &Industry (FICCI) and Indian Banks' Association (IBA), Das urged banks and NBFCs to pay greater attention to their liabilities and continue to do stress testing of their books. The statement comes days after the RBI increased the risk weights on the exposure of banks towards consumer credit, credit card receivables and NBFCs by 25 per cent to up to 150 per cent. “While credit growth is accelerating in the current period, banks and NBFCs may take due care to ensure that credit growth at the overall, sectoral and sub-sectoral levels remain sustainable and all forms of exuberance must be avoided,” Das said. Bank credit grew by 20.42 per cent to Rs 155.66 lakh crore in the fortnight ended November 3, RBI's latest data showed. Expansion of the credit portfolio itself and pricing of the same should be in sync with the risks envisaged, he said, adding that banks and NBFCs also need to further strengthen their asset liability management. Das said it has been observed that there is an increased reliance on high cost short term bulk deposits while the tenure of the loans, both in retail and corporate loans, is getting elongated. On the RBI's recent move to tighten the risk weights on unsecured personal loans and credit cards by banks and NBFCs, Das said the measures were announced in the overall interest of sustainability. The steps are calibrated, targeted and pre-emptive in nature. Das, however, noted that major growth drivers like loans for housing, vehicles and the Micro, Small and Medium Enterprises (MSME) sector have been excluded from these measures. “We have excluded them (housing loans, vehicles and MSMEs) because at the moment we don't see a possibility of a build-up of stress. I am not ruling out that possibility (of stress) but it was also a conscious decision to leave out certain sectors which are contributing to growth which also need to be sustained,” Das said. The governor further said that the increasing interconnectedness between banks and non-banks merits close attention. “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 are large net borrowers of funds from the financial system, with their exposure from the banks being the highest. Banks are also one of the key subscribers to the debentures and commercial papers issued by NBFCs. As of September 2023, banks credit to the NBFC sector registered a year-on-year growth of 26.3 per cent at Rs 14.19 lakh crore, the latest RBI data showed. The governor said though the interest rates are deregulated, certain non-banking finance companies-micro finance institutions (NBFCs-MFIs) appear to be enjoying relatively higher net interest margins. MFIs should ensure that interest rates are transparent and not usurious. Das said the model-based lending approach which banks and NBFCs adopt while collaborating with fintechs, needs to be robust and should be tested and re-tested periodically. “Banks and NBFCs need to be careful in relying solely on pre-set algorithms as assumptions based on which the models are operated.,” he said. Speaking on inflation, the governor said the headline inflation softened to 4.9 per cent in October and there is moderation in core inflation. Even there is evidence of household inflation expectations becoming more anchored. “Headline inflation, however, remains vulnerable to recurring and overlapping food price shocks coming from global factors and adverse weather events,” he said. The frequency and intensity of such shocks have increased in the recent period, Das said, adding that the monetary policy in such a scenario needs to remain watchful and actively disinflationary while supporting growth. “We are completely focused on the 4 per cent target. We maintain Arjuna's eye on the inflation target,” he said. The governor's remark comes a few days before the next meeting of the Monetary Policy Committee (MPC), scheduled from December 6-8. The government has mandated the RBI to maintain retail inflation or CPI at 4 per cent with a band of +/-2 per cent. In the October policy, Das emphatically said that the RBI's inflation target is 4 per cent and not 2 to 6 per cent. On growth, Das said despite global slowdown, the Indian economy has remained resilient and continued to grow due to its higher reliance on domestic demand which enabled the economy to weather multiple global headwinds. He said the country has moved from an era of twin deficit and twin balance sheet stress to the current period of twin balance sheet advantage.
