In A Sweet Spot

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Commercial lenders including NBFCs are on a path of healthy growth despite tightening risk weight norms by the regulator


Post-pandemic recovery in the banking sector has many surprises on the upside. The most important eye-opener was the steady growth in non-farm credit off-take which has defied many doomsday predictions. To be precise, the post-pandemic behaviour of the retail credit portfolio has improved both in terms of growth and risk parameters. Data indicates a significant improvement in asset quality parameters coupled with broad-based growth across retail loan segments. As J. Swaminathan, Deputy Governor, Reserve Bank of India, said in a January 10 speech, “Undoubtedly, these are good times for the financial services industry, characterised by robust parameters of performance and soundness. This enviable position is owed, in no small measure, to the hard work and unwavering dedication of the compliance, risk management, and internal audit functions”.

Indeed, commercial lenders including non-banking financial companies (NBFCs) have worked very well to ensure financial stability by sticking to compliance norms as detailed by the regulator. For instance, prudential norms on single and group entity exposures are strictly adhered to by banks and non-banks and have been instrumental in maintaining balance sheet strength. It is heartening to note that banks and NBFCs have achieved credit growth in double digits over the past decade despite exposure caps and limits while simultaneously improving asset quality.

The growing use of technology and the pervasive digitalisation of finance, however, brings forth new challenges in the form of cyber-security risks. The regulator has recently exhorted fintech players to have a self-regulatory organisation (SRO) to ensure voluntary compliance posed by risks inherent to fintech lending. Very recently, the regulator has also cracked the whip on a digital player asking it to stop all deposits and credits and wallet top-ups henceforth. These measures should be read in consonance with measures announced recently to increase risk weights on unsecured lending. It will usher in financial stability by weeding out highly risky players and in effect serves to strengthen serious and prudent players in the system.


The latest RBI Monthly Bulletin rightly points out that though the recent surge in credit flows has not resulted in stress build-up in the retail credit segment, policymakers may consider using structural prudential tools, viz., debt-service ratio and debt-to-income ratio of retail borrowers as additional monitoring metrics. Lenders should also use emerging technology ecosystem infrastructure such as account aggregators to strengthen credit underwriting. Such frameworks facilitate monitoring of borrower leverage in a holistic fashion.

I may also mention here that contrary to several predictions, commercial lenders including NBFCs’ unsecured portfolio has seen healthy growth in the third quarter of current fiscal despite increase in risk weights. This is not surprising as most banks are capitalised well above the regulatory minimum. NBFCs are also in the same league as their average CRAR or risk weighted assets is more than 20% against the regulatory requirement of 15%. Hence, going forward, it is only logical to expect unhindered credit growth from both banks and NBFCs, provided they do not dilute their guard against credit risks and slippages.

An unfinished goal, even as we are on track to reach the $5 trillion mark, is to achieve a greater degree of formalisation. NBFCs and banks are a vital cog in this battle as they ensure last mile credit delivery. The success achieved in the microfinance space bears testimony to this fact. This segment has been a win-win for both lenders and borrowers — for the lenders due to margin improvement and for borrowers due to hassle free credit access. Hence, I am of the view that the finance balancing act by lenders augur well for financial stability and growth.


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