Mumbai, The Reserve Bank's effort is to detect a crisis early and act accordingly, Governor Shaktikanta Das said on Thursday, asserting that not taking any action on the unsecured lending front would have created "bigger problems".
The November 2023 action to curb the growth of riskier unsecured loans has had the desired impact as the growth of such portfolios slowed, Das said while speaking at an international conference on financial resilience at the College of Supervisors of the RBI here.
Das said the restrictions on unsecured loans were a result of the view that there could be a potential problem in the credit market due to the growth of unsecured loans.
The overall metrics looked good, but there was "clear evidence" of dilution of underwriting standards, lack of proper assessments and a bandwagon mentality to push unsecured lending among some lenders, he added.
"We think that if left unaddressed, these vulnerabilities can become a bigger problem. Therefore, we think it is better to act early and curb credit growth," Das said.
He expressed satisfaction that the RBI's action has had the desired impact as the growth of unsecured loans has slowed down.
Das said growth in credit card portfolios has slowed to 23 per cent from 30 per cent before the Reserve Bank of India's (RBI) action, while growth in bank loans to businesses Non-banking financial institutions (NBFC) has slowed to 18 per cent. from the previous 29 percent.
It may be noted that on November 16 last year, the RBI increased the risk weights of unsecured loans and exposure to NBFCs, which will make banks set aside larger amounts of capital for such assets.
Das, who has been heading the central bank for over five years, said the RBI has made changes in its approach to be as proactive as possible to ensure systemic stability.
"I cannot afford to say that we are smelling a crisis every time, but it is our effort to smell a crisis. It is at the forefront of our agenda," Das said.
This agenda is at the back of the RBI's mind all the time, to see if something is brewing either at a systemic level or in an individual organisation, he said.
The governor asked lenders to look beyond "pointless" profit growth and take other factors into account.
"While business models may be designed to drive profitability and growth, they sometimes contain vulnerabilities that may not be apparent. The pursuit of business growth is important, but it should never come at the expense of taking unacceptable risks," he said.
Das also made reference to the YES Bank bailout, pointing out that the RBI had been closely monitoring developments at the bank since late 2018 and had to launch the multi-institution bailout in March 2020, just before the onset of the pandemic.
"India's domestic financial system is now in a much stronger position than before entering the Covid crisis period. The Indian financial system is now in a much stronger position, characterized by strong adequacy of the capital, low levels of non-performing assets, and healthy profitability of banks and non-banking lenders, or NBFCs," Das said.
The RBI has made a number of efforts to increase its oversight role, including arranging for a detailed presentation to the bank's board by a CEO if he finds something wrong and also meeting a bank's auditors if he finds anything wrong. considered necessary, Das said.
On-site supervision of credit reporting companies has become "annual and intense", the RBI governor added.
The November 2023 action to curb the growth of riskier unsecured loans has had the desired impact as the growth of such portfolios slowed, Das said while speaking at an international conference on financial resilience at the College of Supervisors of the RBI here.
Das said the restrictions on unsecured loans were a result of the view that there could be a potential problem in the credit market due to the growth of unsecured loans.
The overall metrics looked good, but there was "clear evidence" of dilution of underwriting standards, lack of proper assessments and a bandwagon mentality to push unsecured lending among some lenders, he added.
"We think that if left unaddressed, these vulnerabilities can become a bigger problem. Therefore, we think it is better to act early and curb credit growth," Das said.
He expressed satisfaction that the RBI's action has had the desired impact as the growth of unsecured loans has slowed down.
Das said growth in credit card portfolios has slowed to 23 per cent from 30 per cent before the Reserve Bank of India's (RBI) action, while growth in bank loans to businesses Non-banking financial institutions (NBFC) has slowed to 18 per cent. from the previous 29 percent.
It may be noted that on November 16 last year, the RBI increased the risk weights of unsecured loans and exposure to NBFCs, which will make banks set aside larger amounts of capital for such assets.
Das, who has been heading the central bank for over five years, said the RBI has made changes in its approach to be as proactive as possible to ensure systemic stability.
"I cannot afford to say that we are smelling a crisis every time, but it is our effort to smell a crisis. It is at the forefront of our agenda," Das said.
This agenda is at the back of the RBI's mind all the time, to see if something is brewing either at a systemic level or in an individual organisation, he said.
The governor asked lenders to look beyond "pointless" profit growth and take other factors into account.
"While business models may be designed to drive profitability and growth, they sometimes contain vulnerabilities that may not be apparent. The pursuit of business growth is important, but it should never come at the expense of taking unacceptable risks," he said.
Das also made reference to the YES Bank bailout, pointing out that the RBI had been closely monitoring developments at the bank since late 2018 and had to launch the multi-institution bailout in March 2020, just before the onset of the pandemic.
"India's domestic financial system is now in a much stronger position than before entering the Covid crisis period. The Indian financial system is now in a much stronger position, characterized by strong adequacy of the capital, low levels of non-performing assets, and healthy profitability of banks and non-banking lenders, or NBFCs," Das said.
The RBI has made a number of efforts to increase its oversight role, including arranging for a detailed presentation to the bank's board by a CEO if he finds something wrong and also meeting a bank's auditors if he finds anything wrong. considered necessary, Das said.
On-site supervision of credit reporting companies has become "annual and intense", the RBI governor added.