Growth is important, but not at cost of unacceptable risks: RBI governor

Business models designed for profitability could contain vulnerabilities that may not be apparent, says Shaktikanta Das

Banks and non-banking financial companies (NBFCs) should not take “unacceptable risks” in the pursuit of growth and they must have robust risk mitigation framework, Reserve Bank of India (RBI) Governor Shaktikanta Das said here on Thursday. He was speaking at the Global Conference on Financial Resilience organised by the College of Supervisors.

“Pursuit of business growth is important, but it should never come at the expense of taking on unacceptable risks,” Das said. “While business models may be designed to drive profitability and growth, they sometimes contain vulnerabilities that may not be apparent,” he said, adding that both regulated entities and supervisors need to be vigilant to risks, if any, in their business models.

 

The RBI Governor said robust risk mitigation ensures long-term success and resilience of a regulated entity as well as of the overall financial system.

“I wish to highlight the importance of ethics in governance, which involves compliance with laws and regulations, both in letter and spirit; pursuit of sustainable business practices; and avoidance of mindless pursuit of bottom lines,” Das said.

He said strong governance is at the core of resilience — especially in the financial sector — which is the bedrock of informed and strategic decisions that align with long-term goals and risk-management principles.

The RBI emphasises on governance of regulated entities and has imposed business restrictions on some of them due to “material supervisory” concerns.

Das said when serious problems appear in a financial entity, an RBI officer of the rank of executive director addresses the full board of that organisation and shares the regulator’s concerns.

When material discrepancies are found between an auditor’s report and RBI’s supervisory findings, or when certain material issues are not properly addressed, the central bank invites the auditors for a direct discussion.

“We now look at the sustainability of business models of banks and NBFCs. Root cause analysis of problems and vulnerabilities are undertaken,” he said, adding that advance action is initiated wherever the regulator notices or smells a crisis.

Commenting on the RBI’s last November decision to increase risk weights for loans for unsecured credit and bank loans to NBFCs, Das said it brought down credit growth in these segments.

“Our timely action has resulted in a situation where the growth of unsecured loans (is down) — it was in the order of 30 per cent year-on-year for credit cards, now moderated to 23 per cent. Similarly, bank lending to NBFCs, which was 29-30 per cent, has come down to 18 per cent,” he said.

“Please mark my words, we thought if left unattended, these vulnerabilities can become a bigger problem,” he said, adding it was better to act in advance and slow down the credit growth as RBI could see some evidence of dilution of underwriting standards — “some evidence of proper (credit) appraisal not being done”.

In view of regulated entities leveraging technology while managing their risks, resulting in higher dependency on third-party vendors and service providers, Das cautioned that vendors’ inability to deliver services reliably can directly impact the regulated entities’ operations and customer service.

“Therefore, a thorough due diligence becomes necessary before selecting third-party vendors. This includes assessing their financial sustainability, technical capabilities, security standards, and their ability to comply with regulations,” Das said and emphasised that there should be continuous monitoring of third-party vendors to ensure that they adhere to the agreed standards and practices.