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RBI Implements Strict Measures for NBFCs and Payments Bank


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Over the past few weeks, the Reserve Bank of India (RBI) has implemented a series of stringent measures targeting Non-Banking Financial Companies (NBFCs) and a specific payments bank. The RBI’s actions, which include increasing risk weights on unsecured personal loans and loans provided to NBFCs by banks, highlight the central bank’s concerns about emerging systemic risks within the financial ecosystem, particularly related to NBFCs. These concerns have been previously emphasized by the RBI Governor in discussions with banks and NBFCs.

Surge in Assets Under Management (AUM) of NBFCs

In the post-pandemic period, 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, which reached 25.8% in FY23, can be attributed to pent-up demand. Surprisingly, this growth has continued unabated into FY24, with a substantial increase of 32.5% in the first half of the fiscal year. This sustained growth is believed to be a primary reason for the recent interventions by the RBI.

Key Concerns and Reasons for RBI Interventions

There are several key concerns that have prompted the RBI’s interventions:

  1. Potential Increase in Non-Performing Assets (NPAs): Despite the rapid increase in NBFC AUM, there has not been a corresponding rise in non-performing assets (NPAs). In fact, net NPAs are currently at a ten-year low of 1.5%. However, given the unseasoned nature of the portfolio, there is a potential for NPAs to increase. This highlights the need for early moderation to mitigate systemic risks.
  2. Speculative Activities and Retail Participation in Markets: There is concern that funds borrowed by NBFCs are being channeled into speculative activities, particularly in 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. Additionally, 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.
  3. Precautionary Steps by the RBI: It is important to note that these measures should not be seen as reactions to existing systemic risks, but rather as precautionary steps to prevent such risks from materializing. The RBI is known for its timely actions, and these interventions reflect its proactive approach, ongoing analysis of data, and willingness to take prompt action when necessary.

Confidence in the Indian Financial System

The columnist emphasizes that the Indian financial system is currently in a strong state, arguably better than most other global economies, including those of the developed world. This affirms confidence in the regulator’s proactive approach, continuous data analysis, and prompt action-taking when required.

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