RBI: Banks and NBFCs Maintain Financial Stability; Close Links Warrant Ongoing Scrutiny

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RBI: Banks and NBFCs Maintain Financial Stability; Close Links Warrant Ongoing Scrutiny

The Reserve Bank of India (RBI) has affirmed the robustness of the Indian banking system and non-banking financial companies (NBFCs), emphasizing their sound and resilient nature. However, the RBI has issued a caution regarding the considerable interconnectedness between these entities, signaling the need for vigilant monitoring.

According to the RBI's "Trend and Progress of Banking in India 2022–23" report, the financial health of banks and NBFCs is underpinned by high capital ratios, enhanced asset quality, and robust earnings growth. This positive scenario has facilitated double-digit credit growth and supported domestic economic activities. Nevertheless, the RBI highlights that sustaining this progress requires continuous reinforcement of governance and risk management practices, along with the accumulation of additional buffers.

The report anticipates further enhancement in the Indian banking system, foreseeing improved asset quality, high capital adequacy, and strong profitability. NBFCs are also expected to strengthen their financial indicators, supported by sufficient capital, increased provisions, and improved asset quality. The overall financial stability is attributed to the strengthened financial positions of corporates and their ongoing efforts to deleverage their balance sheets.

The RBI raises concerns about the contagion risk arising from the substantial interconnectedness between banks and NBFCs. Given the strategic importance of NBFCs, the report underscores the need for close attention to these concentrated linkages, particularly as NBFCs are significant net borrowers from the financial system with multiple borrowing relationships and interconnected debentures and commercial papers.

While acknowledging the well-capitalized status of banks, the RBI advises continuous evaluation of their exposure to NBFCs. Simultaneously, it urges NBFCs to diversify their funding sources and reduce reliance on bank funding.

Addressing the surge in consumer credit post-Covid, especially in unsecured portfolios, the RBI notes that the asset quality of unsecured retail loans has not shown deterioration. However, it calls for prudential interventions, such as increased risk weights, to address potential concerns.

On a different note, the RBI observes a lag in banks' efforts to address customer grievances, emphasizing the importance of quality grievance redressal beyond monitoring turnaround time and management information systems. It advocates greater empathy in services, especially for vulnerable groups, and stresses the importance of user-friendly access points for customers with special needs.

The RBI also highlights systemic risks associated with a reliance on a small number of third-party service providers. To mitigate this, it proposes joint audits of IT service providers by banks, aiming for a comprehensive and standardized evaluation to ensure the resilience of the financial system.






RBI Report on Banking and NBFCs
Indian Banking System Resilience
NBFC Interconnectedness Warning
Financial Stability Assessment by RBI
Double-Digit Credit Growth in India
Governance and Risk Management Practices
NBFC Contagion Risk and Banking Exposure
Indian Financial Indicators Outlook
Prudential Measures for Consumer Credit
Customer Grievance Redressal in Indian Banks


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