Diversify fund-raising, reduce dependency on banks: RBI to NBFCs

The Reserve Bank of India (RBI) has issued directives to non-bank finance companies (NBFCs) to diversify their fundraising strategies and reduce reliance on traditional banking institutions. The central bank emphasised the importance of strengthening balance sheets through robust corporate governance practices, while also urging vigilance against fraud and data breaches.

The RBI's insights were part of the 'Trend and Progress of Banking in India 2022-23' report, which highlighted the overall resilience of the Indian banking system and NBFCs. The report acknowledged the sound financial position, supported by high capital ratios, improving asset quality, and robust earnings growth.

According to the report, the consolidated balance sheets of scheduled commercial banks (SCBs) expanded by 12.2 per cent in 2022-23, driven by credit growth in the retail and services sectors. While deposit growth showed an uptick, it trailed credit growth.

Looking ahead, the report emphasised the increasing interconnectedness between banks and NBFCs, urging the latter to diversify funding sources and reduce dependency on bank funding. It stressed the need for greater empathy in customer services for both banks and non-banks.

The report highlighted the necessity for concerted efforts by all stakeholders to safeguard the banking and payment systems from the risks of fraud and data breaches arising from cyber threats. With the adoption of new technologies, the report acknowledged the rising risks of cyberattacks, data breaches, and operational failures.

To address these challenges, the report recommended that banks better recognise and address technology and cybersecurity risks, emphasising the evolving nature of risks faced by the banking system. Building resilience through good governance and robust risk management practices was deemed essential.

The report underscored the importance of further strengthening the balance sheets of banks and NBFCs to align with the growing aspirations of the Indian economy. It noted the healthy growth of banks' balance sheets in 2022-23, driven by increased deposits and credit growth, particularly in the retail and services sector.

Additionally, the report highlighted the macroprudential measures implemented by the Reserve Bank in November 2023 to ensure sustained financial stability while supporting growth, particularly in the context of increased unsecured advances.

The report provided an overview of the improved asset quality of banks, with the gross non-performing assets (GNPA) ratio reaching a decadal low of 3.9 per cent at the end of March 2023 and further reducing to 3.2 per cent in September 2023.

In the context of NBFCs, the report recognised their role in delivering credit and financial products to unbanked and underserved areas. It highlighted NBFCs' double-digit credit growth, driven by unsecured loans, and their contribution to overall financial inclusion and economic growth. The report noted that NBFCs remain well-capitalised, with a capital adequacy ratio (CRAR) exceeding regulatory requirements.

Specifically, the report addressed Housing Finance Companies, noting that credit accelerated in 2022-23 due to a post-pandemic shift in preference for home ownership. The RBI, as part of calibrated macroprudential measures, increased risk weights on select retail loans by NBFCs and credit to NBFCs by SCBs.

In conclusion, the Reserve Bank reaffirmed its commitment to preserving financial stability while enhancing efficiency in the financial system, emphasising the need for regulated entities to focus on identifying and mitigating potential stress in the highly uncertain geopolitical environment.

(With PTI inputs.)