RBI dy. governor red flags deleterious impact of runaway loan growth

Reminding the people that loans can be a double-edged sword for the economy, Reserve Bank deputy governor M Rajeshwar Rao has said that RBI will keep a hawk eye on credit growth in the country and be prompt to mitigate risks arising thereby. Speaking at an event in the last week of March Rao said widespread unbridled growth of credit could trigger systemic risks and the central bank has to strive for a robust and resilient financial intermediation system supported by an appropriate regulatory and supervisory framework.

The deputy governor admitted that technological innovations indicate great promise for the financial sector by offering a lot of possibilities to expand the reach of financial firms, add variety to product offerings and improve convenience level for customers but laced his optimism with a word of caution characteristic of a central bank senior official.

“At the same time, we need to be alert to the possibilities that new entrants into the financial services space, including fintech firms, could significantly alter the universe of financial services providers,” asserted Rao.

On the topic of containing risks from pro-cyclical credit growth, the deputy governor said runaway credit growth coupled with lax credit discipline, or underwriting standards, can usher in disaster for the financial entity concerned and if it spread in the financial ecosystem, it could lead to systemic concerns.

“From this perspective, in recent times, credit off-take 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. After reminding the financial services world repeatedly about too fast growth of unsecured credit, the RBI issued a direction in November last year to tighten norms and raised risk weight for consumer credit exposure by 25% to 125% for all NBFCs and commercial banks.

Rao argued that the galloping unsecured loans necessitated intervention by the banking regulator though the broader asset quality did not indicate any significant signs of concern.

The RBI deputy governor acknowledged the role of modern technology in taking financial services to the doorstep of poorly served segments. Technology can also be harnessed to strike a balance between regulation and innovation, Rao said, adding regulations tailored for niche market players helps them to be simultaneously efficient and innovative,