On Thursday, Reserve Bank of India (RBI) Governor Shaktikanta Das stated that banks and non-banking financing firms (NBFCs) should not take "unacceptable risks" in pursuit of expansion and must have adequate risk mitigation frameworks.
"While business models may be designed to drive profitability and growth, they sometimes contain vulnerabilities that may not be apparent," he told a Mumbai audience. Both regulated firms and supervisors must be attentive for potential dangers in their business strategies.
"Pursuit of business growth is important, but it should never come at the expense of taking unacceptable risks," Das stated at the College of Supervisors' Global Conference on Financial Resilience.
He stated that strong risk mitigation supports the long-term performance and resilience of a regulated firm as well as the whole financial system.The RBI focuses on the governance of regulated organizations and has placed business limits on certain of them owing to "material supervisory" concerns.
Das stated that when major difficulties arise in a financial company, an RBI official with the position of executive director addresses the complete board of that organization and communicates the regulator's concerns.
When there are significant disparities between an auditor's report and the RBI's supervisory conclusions, or when certain important concerns are not adequately handled, the RBI invites the auditors to a direct conversation.
"We are now considering the long-term viability of bank and NBFC business models. "Root cause analysis of problems and vulnerabilities is conducted," he added, adding that if the regulator discovers or smells a crisis, it takes immediate action.
Das commented on the RBI's move in November to boost risk weights for unsecured credit and bank loans to NBFCs, saying it slowed credit growth in both areas.
"Our quick response has resulted in a scenario where the rise of unsecured loans, which was in the order of 30% year on year increase for credit cards, has now slowed to 23%. Similarly, bank lending to NBFCs, which was 29-30%, has dropped to 18%," he added.
