RBI governor Shaktikanta Das asks banks to avoid "all forms of exuberance"

Reserve Bank of India (RBI) Governor Shaktikanta Das issued a word of  caution to the country's lenders, urging them to avoid "all forms of exuberance" in the wake of recent tightening rules for consumer loans.

While credit growth is on the rise, Das stressed on the need for banks and non-banking finance companies (NBFCs) to ensure the sustainability of lending to individual categories.

Addressing an event in Mumbai, Das stated, "All forms of exuberance must be avoided." The RBI had recently instructed banks to allocate more capital against personal loans and lending through NBFCs, expressing concerns about potential risks associated with the soaring demand for small-ticket consumer credit.

Das clarified that these measures are pre-emptive, calibrated, and targeted to address potential risks. The tightening of lending norms is expected to increase borrowing costs and impact consumer loan growth, which has been outpacing overall bank credit.

P.R. Seshadri, Managing Director and CEO of South Indian Bank, highlighted concerns about exuberance in the pricing of loans in certain categories, emphasizing the need for appropriate compensation for the associated risks.

KVS Manian, Whole-time Director at Kotak Mahindra Bank, pointed out that exuberance is not solely based on pricing but also on the rapid accumulation of assets by banks.

Das also urged lenders to be vigilant about potential stress arising from new lending models, cautioning against overreliance on pre-set algorithms for lending decisions. While the RBI did not tighten capital norms for home loans, vehicle loans, and gold loans, Das highlighted risks from the inter-connectedness between banks and NBFCs.

While there are no current signs of stress in housing or vehicle loans, Das encouraged non-bank lenders to diversify their funding sources. He specifically addressed micro lenders, urging them to consider the affordability of loans for lower-income consumers and use interest rate flexibility judiciously.

The RBI Governor's caution comes as the central bank seeks to manage and mitigate potential risks in India's lending landscape.

(With Reuters inputs)