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"Navigating Financial Waters: RBI Governor's Call for Caution in a Dynamic Landscape"

In a recent address, Reserve Bank of India (RBI) Governor Shaktikanta Das emphasized the need for caution in lending practices, warning against exuberance in the banking sector. During the “FIBAC 2023 Conference” organized by Ficci and the IBA, Governor Das raised concerns about the interconnectedness between banks and non-banking finance companies (NBFCs), highlighting the potential for “contagion risk.”

Governor Das acknowledged the recent measures taken by the RBI, including increased risk weights on unsecured consumer loans and credit card exposure for both banks and NBFCs. These measures were described as “preemptive” actions aimed at ensuring the sustainability of the financial system. The RBI’s focus is on specific segments with high growth rates that pose potential risks.

“We have also very recently announced a few macro-prudential measures in the overall interest of sustainability. These measures are preemptive in nature. They are calibrated and targeted,” stated Governor Das.

The central bank is currently prioritizing efforts to strengthen governance, enhance risk management practices, and promote robust lending practices within the financial sector. Governor Das urged banks, NBFCs, and other financial entities to conduct stress tests on their books, emphasizing the importance of proactive risk management.

“While there may not be any immediate cause for worry at the current juncture, banks and NBFCs would be well-advised to take certain precautionary measures to remain on top of things,” cautioned Governor Das.

Lenders were specifically advised to reinforce their risk management practices and establish additional buffers. Despite the sector’s current positive performance, Governor Das encouraged financial institutions to reflect on potential risks and exercise prudence in their lending activities.

He emphasized the importance of aligning loan pricing with envisaged risks and strengthening asset liability management. “They may give greater attention to their liabilities side. In certain cases, we have observed increased reliance on high-cost short-term bulk deposits while the tenure of the loans, both in retail and corporate loans, is getting elongated,” noted Governor Das.

Governor Das expressed deep concern over the high exposure of banks to NBFCs, pointing out the increasing inter-connectedness between banks and non-banks. Shadow banks, in particular, are substantial net borrowers of funds from the financial system, with their exposure from banks being notably high.

“Such concentrated linkages may create a contagion risk,” warned Governor Das. While acknowledging that banks are well-capitalized, he stressed the need for constant evaluation of exposure to NBFCs and the exposure of individual NBFCs to multiple banks. He further suggested that NBFCs focus on diversifying their funding sources to mitigate risks.

In conclusion, Governor Shaktikanta Das’s address serves as a prudent reminder for the banking and finance industry to navigate the current landscape with caution, addressing potential risks and ensuring the sustainability of the financial system.

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