Growth is important, but not at cost of unacceptable risks: RBI governor
June 20, 2024
Business models designed for profitability could contain vulnerabilities that may not be apparent, says Shaktikanta Das
Banks and non-banking finance companies (NBFCs) should not take “unacceptable risks” in the pursuit of growth and they must have robust risk mitigation frameworks, said Reserve Bank of India (RBI) Governor Shaktikanta Das on Thursday.
“While business models may be designed to drive profitability and growth, they sometimes contain vulnerabilities that may not be apparent,” he said in Mumbai. Both regulated entities and supervisors need to be vigilant to risks, if any, in their business models.
“Pursuit of business growth is important, but it should never come at the expense of taking on unacceptable risks,” Das said while speaking at the Global Conference on Financial Resilience organised by the College of Supervisors.
He said robust risk mitigation ensures the long-term success and resilience of a regulated entity as well as of the overall financial system.
The RBI emphasises on governance of regulated entities and has imposed business restrictions on some of them due to “material supervisory” concerns.
Das said when serious problems appear in a financial entity, an RBI officer of the rank of executive director addresses the full board of that organisation and shares the regulator’s concerns.
When material discrepancies are found between an auditor’s report and RBI’s supervisory findings, or when certain material issues are not properly addressed, RBI invites the auditors for a direct discussion.
“We now look at the sustainability of business models of banks and NBFCs. Root cause analysis of problems and vulnerabilities are undertaken,” he said, adding advance action is initiated wherever the regulator notices or smells a crisis.
Commenting on the RBI’s decision in November to increase risk weights for loans for the unsecured credit and bank loans to NBFCs, Das said it brought down credit growth to these segments.
“Our timely action has resulted in a situation where the growth of unsecured loans – it was in order of 30 per cent year on year growth for credit cards, now moderated to 23 per cent. Similarly, bank lending to NBFCs which were also 29-30 per cent have come down to 18 per cent,” he said.
“Please mark my word, we thought if left unattended, these vulnerabilities can become a bigger problem,” he said, adding it was better to act in advance and slow down the credit growth because RBI could see some evidence of dilution of underwriting standards, “some evidence of proper [credit] appraisal not been done”.
[The Business Standard]
