India’s victory over its financial system’s bad loan problem took much pain and hard work. It would therefore be a shame if the recklessness of some unruly players were to undo those gains.
This explains the warning that Reserve Bank of India (RBI) governor Shaktikanta Das issued to non-banking financial companies (NBFCs) seen to be placing business growth over prudence, which could lead to a build-up of risks across the credit ecosystem.
Some NBFCs have also resorted to usurious lending practices amid pressure from their investors to increase returns on investment. Further, compensation structures linked to expansion targets are also found to be driving undesirable trends.
To be sure, the industry is playing a welcome role in expanding credit availability, especially to segments that are underserved by regular banks on account of geographical constraints or other restraining factors.
But while NBFCs go about filling market gaps, they must stay within regulatory bounds and deploy business practices that are sustainable and non-exploitative. RBI’s caution should serve as a wake-up call for them to take corrective action themselves before the regulator is forced to intervene.