The Reserve Bank of India has been whiplashing lenders to strengthen corporate governance and risk management in order to combat long-term risks, but this is likely to bring in volatility in business in the near term, according to Fitch Ratings.
In light of the RBI's cap on cash payouts against gold-backed lending, some non-bank entities are likely to pivot towards disbursing via bank accounts. This may slow down fresh lending, Fitch said.
"Some borrowers who still prefer cash-based channels may turn to alternatives, such as the informal sector," the ratings agency added.
Fitch expects the credit profiles of gold-focused NBFCs such as Muthoot Finance Ltd. and Manappuram Finance Ltd. to remain resilient if a reasonable portion of cash borrowers shift towards bank transactions. Although the advisory issued by the RBI to these entities has created new risks,.
The RBI halted IIFL Finance Ltd.'s new gold-backed lending and related off-balance sheet funding transactions in March. Fitch Ratings considers cash disbursals of gold-backed loans exceeding Rs 20,000 "to be more severe".
"Regulations are not always interpreted consistently across the financial sector, and firm-level implementation varies. This, in part, reflects the sector's rapid evolution, but the environment can make financial supervision more challenging, and contribute to compliance and governance lapses," Fitch Ratings said.
After several failures among NBFCs in FY19, these companies trimmed their short-term funding and shored up capital.
However, as the economic backdrop has become more benign, risk appetites have started to increase, the ratings agency said.
RBI Deputy Governor Swaminathan J. urged for robust governance and assurance functions against a multitude of risks emanating from the evolving financial landscape in a conference on Wednesday for select NBFCs.
"In the highly dynamic and challenging environment in which financial entities operate, they are exposed to a multitude of risks that can impact their financial and operational resilience," the RBI said in a statement on Wednesday.
Swaminathan also spoke about credit risks from rule-based credit models and liquidity risks, highlighting that the central bank expects lenders to "ensure independent and meaningful assurance functions as well as fair and transparent conduct towards customers."
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