MUMBAI (Reuters)

Some Indian non-banking finance companies (NBFCs) are aggressively pursuing growth and chasing excessive returns on equity, posing financial stability risks, according to the central bank governor.

The Reserve Bank of India (RBI) is "closely monitoring" this and "will not hesitate to take appropriate action, if necessary," said Governor Shaktikanta Das. He indicated that "self-correction" would be the desired objective.

Over the past year, the RBI has warned the financial sector against "all forms of exuberance," tightened rules for credit cards and personal loans, and made borrowing from banks more expensive for non-bank lenders. The RBI has also penalized entities and imposed business restrictions on companies that breached rules.

Overall loans provided by banks rose 13.6% from a year earlier in August, compared to a 19.7% growth in August 2023, according to RBI data. Loan growth in August this year was at 14.9%, not accounting for the merger of private lender HDFC Bank and its parent Housing Development Finance Corp.

Das emphasized that an imprudent "growth-at-any-cost" approach would be counterproductive for the health of NBFCs. He expressed concern over some NBFCs charging "usurious" interest rates, and having "unreasonably high" processing fees and frivolous penalties. These practices seem driven by business targets rather than actual demand, he warned.

He indicated that the resultant high cost and high indebtedness could pose financial stability risks if these issues are not addressed by the NBFCs, although he did not name any specific entities.

NBFCs may need to reevaluate their compensation practices and incentive structures, which seem to be "purely target driven," he added. In particular, Das noted that microfinance institutions (MFIs) and housing finance companies (HFCs) pursue excessive returns on equity, sometimes under investor pressure.

While bad loans in the banking sector remain low, analysts have warned of potential stress in unsecured loans. Certain non-bank lenders are experiencing elevated slippages and high credit costs, which the central bank continues to monitor, as highlighted by Deputy Governor Swaminathan J during a post-policy press conference in Mumbai.