The financial sector is performing well, but it must avoid "all forms of exuberance" as loan growth rises, according to Reserve Bank of India governor Shaktikanta Das, who cited four areas of worry on Wednesday.
"At the moment, there may not be any immediate cause for concern, but banks and NBFCs would be well advised to take certain precautionary measures," he said at the annual FICCI-IBA banking conference, referring to non-banking financial firms.
He outlined four areas where the financial sector must exercise caution. "First, 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 are avoided," he added.
Banks must improve asset liability management. "In certain cases, we have observed increased reliance on high-cost short-term bulk deposits while the tenure of the loans, both in retail and corporate loans, is getting elongated," he added.
Second, the growing connectivity between banks and non-banking financing organisations raises the possibility of contagion. Banks must continually assess their exposure to NBFCs. Also Read: Banks and NBFCs must be wary about stress buildup: Das Shaktikanta
"NBFCs, on their part, should focus on broad basing their funding sources and reducing over-dependence on bank funding," he stated.
He requested that microfinance institutions not charge usurious interest rates. "Despite the fact that interest rates are deregulated, certain NBFCs-MFIs appear to have relatively higher net interest margins." It is on to microfinance lenders to ensure that the flexibility they have in determining interest rates is used wisely. They will be held accountable for ensuring that interest rates are clear and not usurious."
Das's fourth remark was about algorithm-based financing models: the fintech industry should evaluate them on a regular basis and keep an eye out for hazards.
"An important aspect that deserves attention in this context is model-based lending via analytics." Banks and NBFCs must exercise caution when depending only on pre-set algorithms as assumptions for operating models. "These models should be robust, tested, and re-tested on a regular basis," he stated.
