Reserve Bank of India Governor Shaktikanta Das said the tighter rules for consumer lending were pre-emptive and advised lenders to continue stress tests and precautionary measures to avoid "exuberance".
The recently announced macro prudential measures are in the "overall interest of sustainability", "pre-emptive in nature", "calibrated and targeted", Das said, speaking at the FIBAC 2023 Conference organised by Ficci and IBA. He, however, underscored that major growth drivers like loans for housing, vehicles and small businesses have been excluded.
The central bank raised risk weights on personal and unsecured loans to check the surge in such lending. Analysts said that will make such lending costlier for banks and non-bank lenders.
"Banks, NBFCs and other financial entities must continue to do stress testing of their books," Das said. "In fact, there is a strong case for companies in the real sector also to stress test their businesses and balance sheets." The governor was referring to the non-financial sector when using the term "real sector".
Banks and NBFCs would be well advised to take "certain precautionary measures", the RBI governor said.
While credit growth is accelerating, lenders may take due care to ensure that credit growth at the overall, sectoral and sub-sectoral levels remain "sustainable and all forms of exuberance are avoided", he said.
Expansion of the credit portfolio and pricing should be in sync with the risks envisaged, Das said, advising banks and NBFCs to strengthen their asset liability management
"In certain cases, we have observed increased reliance on high-cost short term bulk deposits while the tenure of the loans, both in retail and corporate loans, is getting elongated," he said.
As the Indian economy strives to grow in an evolving and uncertain global environment, it is imperative that "our financial sector remains strong", said Das. Though the banks are well-capitalised, they must constantly evaluate their exposure to NBFCs and individual non-bank lenders to multiple banks, Das said. The NBFCs, on their part, should focus on broad-basing their funding sources and reducing overdependence on bank funding, he said.
The Indian banking system continues to be resilient, backed by improved capital ratios, asset quality and robust earnings growth, while the financial indicators of non-banks are also in line with that of the banking system, Das said. "In good times like these, banks and NBFCs need to reflect and introspect as to where potential risks could possibly originate."
Now is the time for them to further strengthen risk management practices and build additional buffers to face the situation, if the business cycle turns adverse, he said.
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