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Reserve Bank of India (RBI) has come across instances of investors pushing some non-banking finance companies (NBFCs) to grow aggressively, which is leading to inappropriate business practices. Flagging risks like poor customer service, entities’ own finances coming under strain and even a possible dent to financial stability through such practices, RBI Governor Shaktikanta Das warned that the RBI will ‘not hesitate’ to take action against errant entities if they continue to follow such practices. He made it clear that the risk is not at a systemic level and it is only a few entities where the RBI has observed certain issues.

Das said driven by the significant accretion to their capital from both domestic and overseas sources, and sometimes under pressure from their investors, some NBFCs - including microfinance institutions (MFIs) and housing finance companies (HFCs) - are chasing excessive returns on their equity. He said such tendencies are leading to practices such as unreasonably high processing fees and frivolous penalties. He added that the same is further accentuated by what appears to be a ‘push effect’, wherein business targets are driving retail credit growth rather than actual demand. The consequent high-cost and high indebtedness could pose financial stability risks, if not addressed by these NBFCs.

He said it is essential for entities to follow sustainable lending practices, a compliance first culture, strong risk management and be sincere on addressing customer grievances. He noted that the Reserve Bank is closely monitoring these areas and will not hesitate to take appropriate action, if necessary and the central bank will desire a self-correction by NBFCs.