RBI Deputy Governor Swenathan J said that excessive dependence on unsecured loans and capital market funding could become a crisis for non-banking financial companies (NBFCs). Addressing a meeting with representatives of NBFCs, the Deputy Governor also warned them against adopting algorithm or machine learning based loan distribution models. Apart from this, he asked NBFCs to speed up monitoring.

New Delhi: Reserve Bank of India Deputy Governor Swaminathan J has cautioned that excessive reliance on unsecured loans and capital market funding could spell trouble for non-bank lenders in the long run.

Addressing heads of assurance functions of non-bank financial companies at a conference organised by the RBI, he also cautioned against excessive reliance on algorithms for lending.

He also made public the RBI's dismay at the tendency for "misguided or intelligent interpretation" of rules to "circumvent the rules" and described it as a "significant threat" to the integrity of the financial system.

Swaminathan J held that

Exposure limits for certain products or areas such as unsecured loans are "too high" to be sustainable in the long run. Most NBFCs seem to be inclined towards doing one type of thing, be it retail loans, top up loans or capital market funding. Overreliance on such products may spell doom at some point in time.

After the Reserve Bank of India (RBI) raised the risk weight on unsecured loans, there was a clamour to divert borrowed funds to the capital markets to prevent lenders from increasing such risks, which prompted the RBI to do so.

On the issue of algorithm-based lending, he said many entities are turning to rule-based credit engines to accelerate growth in books.

RBI will take action

Speaking about the tendency to circumvent regulations for personal gain, Swaminathan said such practices undermine regulatory effectiveness, compromising market stability and fairness.

Such practices undermine trust and confidence in the financial sector, potentially exposing consumers, investors and the broader economy to risks and vulnerabilities. He made it clear that the RBI will not hesitate to initiate supervisory action as demonstrated in recent steps.

NBFCs have grown in dominance in recent times and now account for a quarter of bank credit, up from a sixth in 2013.