Reserve Bank of India Governor Shaktikanta Das has warned of action against those non-banking financial companies (NBFCs) who are pursuing “growth at any cost” that could pose a risk to the economy’s financial stability.

While announcing the bi-monthly policy review on Wednesday, Das asked such NBFCs to be sincere, fair and follow sustainable practices of growth.

"It is important that NBFCs, including MFIs (microfinance institutions) and HFCs (housing finance companies), follow sustainable business goals; a 'compliance first' culture; a strong risk management framework; a strict adherence to fair practices code; and a sincere approach to customer grievances," Das said.

"The Reserve Bank is closely monitoring these areas and will not hesitate to take appropriate action, if necessary," he warned, adding that the central bank wants NBFCs to undertake "self-correction".

The NBFC segment has registered an "impressive growth" over the last few years, Das said, while admitting that such lenders have helped the policy objective of financial inclusion.

However, some NBFCs are pursuing growth aggressively without building up sustainable business practices and risk management frameworks commensurate with the scale and complexity of their portfolio, he rued.

An imprudent ‘growth at any cost’ approach would be counterproductive for their own health,” Das said in his monetary policy statement.

Having raised capital from domestic and foreign sources, some entities are chasing excessive returns on their equity, he said.

Das also raised concerns about MFIs and HFCs imposing usurious interest rates and frivolous penalties on their customers.

“These practices are sometimes further accentuated by what appears to be a ‘push effect’, as business targets drive retail credit growth rather than its actual demand. The consequent high cost and high indebtedness could pose financial stability risks if not addressed by these NBFCs,” added Das.

The ‘push effect’ implies lenders pushing retail credit as per their business targets rather than actual demand. 

Das also asked NBFCs to review their staff compensation practices, variable pays and incentive structures to ensure they are not purely driven by sales targets. “Such practices may result in adverse work culture and poor customer service,” he said.

While acknowledging that the health parameters of banks and NBFCs continue to be "strong", Das pointed to the possibility of stress build-up in unsecured loan segments. These could be loans for consumption purposes, microfinance loans and credit card outstandings.

He asked banks and NBFCs to carefully assess their individual exposures in these areas, both in terms of size and quality, and have robust underwriting and monitoring of loans.

“Continued attention also needs to be given to potential risks from inoperative deposit accounts, cybersecurity landscape, mule accounts, etc.,” Das said.