– By Sachin Gupta
The past few weeks have been marked by a series of stringent measures implemented by the Reserve Bank of India (RBI) targeting Non-Banking Financial Companies (NBFCs) and a specific payments bank. Following a circular issued in November 2023, the RBI increased the risk weights on unsecured personal loans and loans provided to NBFCs by banks. These actions underscore the RBI’s concern over emerging systemic risks within the financial ecosystem, particularly concerning NBFCs — a concern that has been previously emphasized by the RBI Governor in discussions with banks and NBFCs.
Post-pandemic, NBFCs have experienced a significant surge in their assets under management (AUM), especially in retail segments such as unsecured personal loans, microfinance institution (MFI) loans, and affordable housing loans. This growth, at 25.8% in FY23, was likely due to pent-up demand but has continued unabated into FY24, with a significant increase of 32.5% in the first half of 2023-24. This continued robust growth appears to be a primary reason for the RBI’s recent interventions.
There are three critical aspects of this situation that merit discussion:
Firstly, despite the rapid increase in NBFC AUM, there hasn’t been a corresponding rise in non-performing assets (NPAs). Net NPAs are at a ten-year low of 1.5%. Total credit costs, including NPA provisions and write-offs, have also remained low, ranging from 0.2% to 2.5% across various retail loan segments. At first glance, the sector seems to be performing well. However, given the unseasoned nature of this portfolio, there is potential for NPAs to increase, underscoring the necessity for early moderation to mitigate systemic risks.
Secondly, there is concern that funds borrowed are being channelled into speculative activities, such as the equity markets. Retail participation in Indian markets has reached an all-time high, with the number of investors nearly tripling to 8.8 crores in the last four years. Post-pandemic, there has been a significant uptick in high-risk derivative trading in options and futures. The RBI’s interventions in segments without end-use restrictions, such as personal and gold loans, indicate a strategic effort to curb speculative risks.
Thirdly, the RBI is known for its timely actions. Therefore, these measures should not be seen as reactions to existing systemic risks but rather as precautionary steps to prevent such risks from materialising.
As I have highlighted in previous columns, the Indian financial system is arguably in its strongest state today, better than most other global economies, including those of the developed world. This affirms our confidence in our regulator’s proactive approach, its ongoing analysis of data, and its willingness to take prompt action when necessary.
(Sachin Gupta is the Chief Rating Officer and Executive Director at CareEdge Ratings.)
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