Constant vigil needed to mitigate risks in financial sector, says RBI Deputy Guv Rao

The Reserve Bank of India (RBI) will keep continuous vigil to mitigate risks as unbridled credit growth can be deleterious to the health of a financial entity and if widespread, it could give rise to systemic concerns, Deputy Governor M Rajeshwar Rao said.

In a special address at the India Investment Summit and Awards organised by Mint in Mumbai on March 30, Rao said as a regulator, the RBI’s endeavour always is to promote a robust and resilient financial intermediation system with an appropriate regulatory and supervisory framework.

He said the technological developments and innovations hold great promise for the financial sector as they have immense potential to increase the reach of financial firms, enhance the range of product offerings and conveniences for customers, expand the ambit of finance to hitherto excluded segments.

”At the same time, we need to be alert to the possibilities that the new entrants into the financial services space, including FinTech firms, could significantly alter the universe of financial services providers,” the deputy governor said.

This could affect the degree of market concentration and competition and may give rise to new challenges, he added.

In his speech, he touched upon various aspects of regulations. On containing risks from pro-cyclical lending, Rao said unbridled credit growth and any laxity in credit discipline or underwriting standards can be deleterious to the health of the financial entity concerned and if widespread, could give rise to systemic concerns.

”From this perspective, in recent times, credit offtake towards the consumer credit segment, especially the unsecured portfolio was observed to be quite substantial. Also, increasing dependency of NBFCs on bank borrowings was leading to regulatory concerns,” he said.

Although asset quality at broader portfolio level was not exhibiting any major signs of stress, the consistent high credit growth reported in the above segments warranted regulatory intervention.

Accordingly, certain quantitative and qualitative measures were undertaken from a macro-prudential perspective.

”As regulators, we would want to ensure continuous vigil to mitigate risks emerging from both within and the periphery of the financial eco-system,” the senior RBI official said.

Citing an example, Rao said the digital lending guidelines issued by the Reserve Bank envisage that regulated entity undertakes the due diligence required for lending decisions even when the loan is being sourced through a lending service provider (LSP).

The increased reliance of banks/NBFCs to identify and onboard borrowers through fintech partners should not mean lowering of underwriting standards and improper pricing of risks, he added.

The deputy governor emphasised that even as the financial landscape evolves and transforms, the underlying principles of good governance, robust risk management, effective compliance, customer protection and responsible business conduct will be increasingly relevant.

A robust culture within the organisation which delivers financial services while embracing these principles will stand the system and the Institutions in good stead in the long run, he added.