Banks, NBFCs must stress test their books, suggests RBI Governor

Mumbai (Maharashtra) [India], November 22 : Reserve Bank of India governor Shaktikanta Das on Wednesday once again called upon banks and non-banking financial companies (NBFCs), among other financial entities to continue to do stress testing of their books.
Today's remarks came close on the heels after the RBI last week came out with a notification increasing the risk weight for consumer credit exposure of banks and non-banking financial companies, in an apparent move to check the sudden growth in unsecured consumer lending.
Shaktikanta Das, while delving into various facets on the Indian banking sector as part of his address at the 'FIBAC 2023 Conference' organised jointly by industry body FICCI and the Indian Banks' Association (IBA), noted that the Indian banking system continues to be resilient, backed by improved capital ratios, asset quality and robust earnings growth.
The financial indicators of non-banking financial companies (NBFCs) are also in line with that of the banking system as per the latest available data, Das remarked.
It is in this context he suggested to the financial entities that it was time for them to further strengthen their risk management practices and build additional buffers to face the situation if the business cycle turns adverse.
He termed the latest increase in risk weight move as "prudential measures in the overall interest of sustainability." He added these measures were pre-emptive in nature.
The central bank reportedly increased the risk weightage for outstanding as well as new unsecured consumer credit exposure of commercial banks as well as NBFCs by 25 percentage points to 125 per cent from 100 per cent earlier. It will invariably push up the lending costs.
"We are monitoring the supervised entities through various onsite and off-site tools, stress testing, vulnerability assessments, thematic studies, data dump analysis, etc. as part of our proactive and forward-looking supervisory approach," the central banker governor said.
He also suggested those companies working in the real sector to stress test their businesses and balance sheets.
Speaking on the banking sector, Das highlighted four specific points. He suggested banks and NBFCs to take due care and ensure that credit growth at the overall, sectoral and sub-sectoral levels remain sustainable and all forms of exuberance are avoided.
Among others, banks and NBFCs are suggested to further strengthen their asset liability management; evaluation of banks' exposure to NBFCs and the exposure of individual NBFCs to multiple banks; and
For microfinance lenders, he noted they asked the entities to ensure that the flexibility provided to them in setting interest rates is used judiciously.
"They are expected to ensure that interest rates are transparent and not usurious," he said.