NBFCs must watch peer-to-peer lending, underwriting standards: RBI deputy governor

Non-banking finance companies (NBFCs) should be mindful of poor underwriting standards and risks emerging from increased lending exposure to one segment, said Reserve bank of India deputy governor Rajeshwar Rao.

In a speech delivered at an event organized by the Confederation of Indian Industries (CII), Rao also cautioned NBFCs against peer-to-peer (P2P) lending practices, which are not in line with regulatory guidelines.

“NBFC-P2Ps have been observed to underplay the risks through various means such as promising high/ assured returns, structuring the transactions, providing anytime fund recall facilities, etc. Let me make it clear that any breach of licensing conditions and regulatory guidelines is non-acceptable,” he added.

Rao also said that NBFCs should focus on maintaining the quality of their loan portfolio.

“In pursuance of high growth, there seems to be a tendency among the NBFCs to get the customers on board with oversimplified underwriting processes. While the ease and convenience for a borrower is very important, this should not come at the cost of underwriting standards,” he said. 

Rao also cautioned non-bank lenders about the risk that emerges from businesses concentrated in only one segment, such as consumer loans. “It is in their self-interest that entities should consider these risks and we expect that Boards are having a pulse on such issues,” he said.

The central banker also noted that microfinance companies have increased "margins disproportionately". “It has been observed that while the lenders were quick to pass on the increased costs to borrowers, they have been reluctant to pass on the benefits envisaged under the new framework. Some of the MFIs have increased their margins disproportionately in new regime. We are not oblivious to the misuse of the freedom provided to the microfinance sector and irresponsible practices would compel us to act,” he added.

Rao also touched upon the issue of allowing NBFCs to accept deposits, saying that it is the non-acceptance of deposits which provides regulatory comfort to the RBI to have lower entry barriers, allow them to specialize in any specific sector of their choice and have lower exit barriers to wind up their businesses.

“Acceptance of deposit, in whatever manner and form, necessitates existence of a macro financial safety net including deposit insurance and central bank liquidity backstop. These safety nets come with increased regulatory rigour and intense supervisory oversight. The NBFCs have evolved as a niche companies serving specific economic function and it is uncharacteristic for them to demand becoming like a bank,” he added.