 "BS BFSI Summit: RBI action on some NBFCs warranted, says K V Kamath")
At least Rs 1.5 trillion was lost in India’s futures and options (F&O) market, with much of it funded through personal and unsecured loans, said K V KAMATH, chairman of the National Bank for Financing Infrastructure and Development (NaBFID) on Friday. In a fireside chat with Tamal Bandyopadhyay at the Business Standard BFSI Insight Summit 2024, he said that the Reserve Bank of India’s (RBI’s) action on unsecured lending and non-banking financial companies (NBFCs) was warranted. Edited excerpts:
The media is abuzz about China’s massive new stimulus package, and there’s a lot of market speculation. Could you share your insights on what’s happening in the US and China and the potential impact on India’s economy?
My assessment is that their growth, where they transformed themselves, was from the year 2000 to 2015. And thereafter, it was but natural that growth slowed down. So what they are now trying to do is stabilise growth at a new peg, as it were. From double digits, we are looking at a 5 per cent or so growth rate. And when they expect that growth will be below that level, they try to support it. That’s what we are seeing in the stimulus that they have just given.
With a $18 trillion economy, even if you grow at 5 per cent, that’s a large addition to it. So they are on that path. And they run it differently from what we do. They have been on a very low interest rate for a very long period. Deposit rates are around 2.5 per cent, lending rates are 4.5 per cent. And I would think that they will grow at 4.5-5 per cent without too much trouble.
With the new US president, we will have to wait and watch what the policy change is. The markets in the US have given it a cheer. So let’s see what follows.
You have unique insight into India’s financial sector. With a rising credit-deposit ratio and increasing financialisation, are we witnessing a structural shift in the financial ecosystem?
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I think it’s a slow shift. And there are a few more elements to it. One is technology. So you have technology, greater access, and a better understanding of what opportunities are there. And this is what is making this financialisation of savings. And that had to happen. Because a saver would like to have a higher rate of interest or a higher earning on his financial assets than what is at present.
And earlier on, that opportunity was not there because that saver — the mass affluent category — would find it difficult to actually access these products. With technology, access to these products has become simple. And with a systematic investment plan, it became even simpler. And add to that something like MFCentral that has provided everybody who can use WhatsApp to see what has happened to his investments periodically.
The financialisation of savings has been propelled by technology. However, that’s only one side of it. We should also reckon what the RBI governor, in particular, has been talking about — the risks in terms of operating in markets in a way that you ought not to.
That is why you have laypeople getting into the F&O segment. And on one side, you had the Securities and Exchange Board of India chairperson say that 90 per cent of the people have lost money. And the back-of-the-envelope calculation will show you that that amount is more than Rs 1.5 trillion. Probably Rs 1.7 trillion if you gross it up properly.
People who have lost money in the F&O segment have come from the unsecured loan market. That is why I think the RBI is right to caution on unsecured lending and end use of money that is borrowed from providers of funding. Because if you then loosely use it, it is going to not come back to you. And that is the situation now.
So, financialisation is good. But I think rash activities are not good. And that is why the red flag is being raised by both regulators.
Recently, the RBI clamped down on certain NBFCs. Do you view this as overreach, or do you think the NBFC sector faces real risks?
I believe that the RBI’s action is warranted. I asked one of the credit-scoring companies about six months ago what score financial technology companies are lending. The score indicator was 550, whereas the typical banker would say 750, maybe 700. So, he saw the shock on my face, and he said each borrower has five loans, and he didn’t stop there; he said they are still looking for more loans. So to a banker, what does this mean that he is taking a fourth loan to do something else?
So this is the pyramid that is being built. Just then, the RBI raised the risk weight and put out a cautionary flag. The good news is I think the banks are, at this point, healthier than ever.
If we look at this last quarter’s numbers of the top four banks, the return on equity (RoE) is between 16 and 20 per cent. I have not seen a RoE of 20 per cent in banking. So banks are running a very healthy book. I think there is some sort of abuse of technology that is happening, and as a result of which, there is laxity in the whole process of lending.
Do you think that every business, particularly the banking and finance business, has to be data-driven? But the other side is fraud and concern about data privacy. Recently, we heard about one insurance company’s data leak, data being sold, etc., and then we are still waiting for the data. What do you see in this entire data space?
We call it cybercrime, but to me, it is technology-driven fraud. It happens to a bank when the bank is unable to understand what the fraudster could do using technology. So there is a learning curve. You have to get ahead of that to survive. And I have seen this from the days of credit cards when we first got into it.
There is a set of fraudsters who will try to get the system. To me, it is a serious issue. And collectively, the system, the technology-driven players will need to figure out... will need to get on top of how to contain the fraud. It is not going to take long. It will happen because it is reaching a level where people now will have to apply their minds on how to resolve this.
Today, it has come to a situation where distributors are controlling data. And the institution, which is actually in business, is not controlling data. Now with technology coming to the fore, a correction has to be done, where people who are in business should make sure that they have access to their own data. Otherwise, they are in jeopardy.