India’s growth should not be based on risk, RBI chief warns
Economic growth should never come at the expense of taking on unacceptable risks, India’s central bank governor as warned.
Reserve Bank of India (RBI) Governor Shaktikanta Das told a recent conference that that was the reason the bank has acted to slow the rapid growth in the value of unsecured retail credit, loans without collateral, and credit card debt.
Speaking at the Second Global Conference on Financial Resilience, the RBI Governor said: “Our timely action resulted in slowing down growth of unsecured loans. If left unattended, vulnerabilities on unsecured loans could have become a bigger problem.”
He also underlined the importance of maintaining robust credit assessment processes and risk management frameworks going forward. He called on banks and non-banking financial companies (NBFCs) to strengthen their oversight mechanisms to mitigate risks associated with unsecured lending.
“Pursuit of business growth is important, but it should never come at the expense of taking on unacceptable risks. Robust risk mitigants are essential for ensuring long-term success and resilience of a regulated entity as well as the overall financial system,” Das said.
Unsecured loans, those not backed by collateral, have seen a surge in demand. This increase has raised concerns within the RBI about the potential for higher default rates and the overall impact on the financial system.
Last year, the central bank increased the risk weight on consumer loans advanced by commercial banks and non-banking finance companies by 25 percentage points. The consumer credit of banks and non-banking financial companies (NBFCs) attracts a risk weight of 100%, which has been revised to 125%.
On supervisors, the governor said they should be ahead of a crisis and act accordingly. He further noted that RBI has an advantage and it is uniquely placed to use various arms of the central bank and to deal with any crisis.
“It is our endeavour to smell a crisis. Supervision has become a very complex task. We need to realise it is a complex world and our supervisory methods should be our best endeavour to remain sync with time. Not only in sync with times and to see stress before it builds up,” Das said.
Regarding emerging new technologies, the governor said artificial intelligence (AI) and machine learning (ML) can enhance predictive analysis and enable banks and NBFCs to identify potential risks and trends more accurately.
He also pointed out that the central bank has no intention to constantly make regulatory changes unless required. Das also noted that the Indian financial system is now in much better position now than it was during the Covid-19 pandemic.
He told conference delegates: “India’s domestic financial system is now in a much stronger position, characterised by robust capital adequacy, low levels of nonperforming assets, and healthy profitability of banks and NBFCs.
“There is, however, no room for complacency. We must keep constant vigil and continue to take proactive measures to sustain this progress.”
Fitch raises India’s growth forecast
Meanwhile, Fitch Ratings has revised India’s growth forecast for the current financial year to 7.2% from the previous 7%, driven by rapid investment growth in recent quarters.
According to the June Global Economic Outlook, India’s economy expanded by 7.8% in the final quarter of FY24, posting growth of 8.2% for the fiscal year.
The rating agency highlighted that falling indirect taxes have contributed to higher GDP growth relative to gross value-added at basic prices, which provides a better indication of underlying economic momentum, currently growing at just over 7%.
Fitch anticipates that investment will continue to rise, albeit slower than in recent quarters.
Additionally, consumer spending is expected to recover due to high consumer confidence.
On headline inflation, Fitch projects that in India it will fall to 4.5% by the end of 2024, averaging 4.3% in 2025 and 2026. The RBI has stated aims of reducing retail inflation to 4%.
Despite the RBI’s focus on curbing retail inflation, Fitch expects only one rate cut this year, bringing the lending rate to 6.25%. This contrasts with Fitch’s March forecast, which predicted a 50 basis points reduction in rates this year.
