Mumbai: Reserve Bank Deputy Governor Swaminathan J has cautioned that excessive reliance on unsecured loans and capital market funding could spell 'misery' for non-bank lenders in the long run.
Addressing heads of assurance functions of non-bank financial companies at a conference organized by the RBI on Wednesday, Swaminathan again warned about over-dependence on algorithms for taking borrowing calls.
He also made public the RBI's disappointment 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.
The career commercial banker-turned-regulator also pointed out that exposure limits for some products or segments such as unsecured loans are "too high" to be sustainable in the long run.
He said, “It appears that most NBFCs have a tendency to do the same thing, such as retail unsecured loans, top up loans or capital market funding.Over-dependence on such products may bring suffering at some later time."
After the Reserve Bank of India (RBI) increased the risk weight on unsecured loans to prevent lenders from taking such risky exposures, there were rumors that borrowed funds were being staked on the capital market, leading to Because RBI had to do this. Ask the lender to monitor the end use of the funds.
On the issue of algorithm-based lending, he said many institutions are turning to rules-based credit engines to accelerate growth in books.
“While automation can increase efficiency and scalability, NBFCs should not allow themselves to be blinded by these models.It is important to recognize that rules-based credit engines are only as effective as the data and criteria on which they are built," he said.
Excessive reliance on historical data or algorithms may lead to mistakes in credit assessment, especially in dynamic or evolving market conditions, he said, calling on NBFCs to maintain a clear view on their capabilities and limitations and make monitoring efforts.
Speaking about the tendency to circumvent rules by misguided or intelligent interpretations for personal gain, Swaminathan said such practices undermine regulatory effectiveness, compromising market stability and fairness.
"Such practices erode trust and confidence in the financial sector, which can lead to vulnerabilities for consumers, investors and the broader economy," he said. He made it clear that RBI will not hesitate to initiate supervisory action as shown by the recent steps.of th regulator.
Swaminathan said the number of NBFCs has increased in recent times and they account for not even a quarter of bank credit compared to one-sixth in 2013.
“As NBFCs are expanding in both size and complexity, they must strengthen governance and assurance functions to maintain a constant watch on potential risks and vulnerabilities. It is important to ensure that the rapid growth and adoption of technology is given its importance. Strong risk management practices,” he said.
He asked NBFCs to pay adequate attention to cyber security risks, adding that the primary risks faced by entities on this front include the threat of data breaches and unauthorized access to sensitive information.He said risk management and internal audit functions need to urgently build their skill sets to be able to periodically assess the IT and cyber security posture and preparedness of their institutions.
He also asked lenders to keep an eye on the threat of concentration risk by paying attention to their business models and made public the RBI's disappointment at the low importance given to assurance functions in NBFCs.
“It is disappointing to note that NBFCs have the lowest average number of compliance staff relative to their size compared to other sectors such as commercial and co-operative banks.
“Despite regulatory measures aimed at ensuring the autonomy of these functions, it is disappointing to see examples where heads of assurance functions are given junior positions within the hierarchy or lack direct access to the board,” he said."
Addressing heads of assurance functions of non-bank financial companies at a conference organized by the RBI on Wednesday, Swaminathan again warned about over-dependence on algorithms for taking borrowing calls.
He also made public the RBI's disappointment 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.
The career commercial banker-turned-regulator also pointed out that exposure limits for some products or segments such as unsecured loans are "too high" to be sustainable in the long run.
He said, “It appears that most NBFCs have a tendency to do the same thing, such as retail unsecured loans, top up loans or capital market funding.Over-dependence on such products may bring suffering at some later time."
After the Reserve Bank of India (RBI) increased the risk weight on unsecured loans to prevent lenders from taking such risky exposures, there were rumors that borrowed funds were being staked on the capital market, leading to Because RBI had to do this. Ask the lender to monitor the end use of the funds.
On the issue of algorithm-based lending, he said many institutions are turning to rules-based credit engines to accelerate growth in books.
“While automation can increase efficiency and scalability, NBFCs should not allow themselves to be blinded by these models.It is important to recognize that rules-based credit engines are only as effective as the data and criteria on which they are built," he said.
Excessive reliance on historical data or algorithms may lead to mistakes in credit assessment, especially in dynamic or evolving market conditions, he said, calling on NBFCs to maintain a clear view on their capabilities and limitations and make monitoring efforts.
Speaking about the tendency to circumvent rules by misguided or intelligent interpretations for personal gain, Swaminathan said such practices undermine regulatory effectiveness, compromising market stability and fairness.
"Such practices erode trust and confidence in the financial sector, which can lead to vulnerabilities for consumers, investors and the broader economy," he said. He made it clear that RBI will not hesitate to initiate supervisory action as shown by the recent steps.of th regulator.
Swaminathan said the number of NBFCs has increased in recent times and they account for not even a quarter of bank credit compared to one-sixth in 2013.
“As NBFCs are expanding in both size and complexity, they must strengthen governance and assurance functions to maintain a constant watch on potential risks and vulnerabilities. It is important to ensure that the rapid growth and adoption of technology is given its importance. Strong risk management practices,” he said.
He asked NBFCs to pay adequate attention to cyber security risks, adding that the primary risks faced by entities on this front include the threat of data breaches and unauthorized access to sensitive information.He said risk management and internal audit functions need to urgently build their skill sets to be able to periodically assess the IT and cyber security posture and preparedness of their institutions.
He also asked lenders to keep an eye on the threat of concentration risk by paying attention to their business models and made public the RBI's disappointment at the low importance given to assurance functions in NBFCs.
“It is disappointing to note that NBFCs have the lowest average number of compliance staff relative to their size compared to other sectors such as commercial and co-operative banks.
“Despite regulatory measures aimed at ensuring the autonomy of these functions, it is disappointing to see examples where heads of assurance functions are given junior positions within the hierarchy or lack direct access to the board,” he said."
