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India Cenbank Chief Das Asks Banks To Avoid “All Forms Of Exuberance”

India’s central bank Governor Shaktikanta Das on Wednesday cautioned the country’s lenders against “all forms of exuberance” days after tightening rules for consumer loans. While credit growth is accelerating, banks and non bank finance companies (NBFCs) need to ensure lending to individual categories is “sustainable”, Das said at an event in Mumbai.

“All forms of exuberance must be avoided.”

Last week, the Reserve Bank of India (RBI) asked banks to set aside more capital against personal loans and lending via NBFCs on concerns that soaring demand for small-ticket consumer credit could lead to a build-up of risk. The tightening of lending norms is expected to push up borrowing costs and dent consumer loan growth, which has been rising at nearly double the pace of overall bank credit.

“These measures are pre-emptive in nature; they are calibrated and targeted,” Das said on Wednesday.

There is a certain amount of exuberance visible in the pricing of loans in some categories, said P.R. Seshadri, managing director and CEO of South Indian Bank.

“This is a little alarming. We need to be paid for the risk that we are taking,” he said, without elaborating on the loan segments where such concerns have emerged.

Right now, the (credit) environment looks relatively risk free, but that may not always be the case, KVS Manian, whole-time director at Kotak Mahindra Bank, said.

“Pricing is not the only reason for calling it (loan growth) exuberant; it’s also that banks can put on assets too fast. That’s what may also be termed as exuberance,” he said.

Das on Wednesday also asked lenders to be watchful of a buildup of stress due to new lending models.

“Banks and NBFCs need to be careful in relying solely on pre-set algorithms” for taking lending decisions, he said.

The RBI last week did not tighten capital norms for home loans, vehicle loans and gold loans. The central bank does not currently see signs of stress in housing or vehicle loans, the governor said on Wednesday. However, he flagged risks that may emerge from the inter-connectedness between banks and NBFCs, and asked non-bank lenders to widen their sources of funding.

The governor also said that so-called micro lenders, some of which have high interest margins, must consider whether the loans are affordable for lower-income consumers.

“Though the interest rates are regulated, certain microfinance institutions (MFI) appear to be enjoying relatively higher net interest margins,” Das said.

“MFIs should ensure that the flexibility provided to them in setting interest rates is used judiciously.”

Source: Reuters