Economy - Reports
Swaminathan J, Deputy Governor of Reserve Bank of India has stated that NBFCs have emerged as powerful engines of credit. By complementing the traditional banking system, they have significantly expanded access to credit, particularly for segments that have historically been underserved or excluded. Through innovative credit delivery models that harness technology and local insights, NBFCs have been able to design customised financial products tailored to diverse borrower needs. Their agility and close connect with customers have enabled them to play a role that is not only complementary to the role traditionally played by banks but, in many instances, catalytic in building a financial ecosystem characterised by deeper intermediation and wider opportunity.
The Deputy Governor made these comments in a speech at the Conference of Non-Banking Financial Companies held at Chennai recently. He noted that business model of NBFCs — while effective — comes with its own set of structural risks. Their funding is short-term as compared to the maturity of their lending or is directed towards higher-risk customer segments. This maturity and credit transformation is at the heart of the NBFC model — but it also demands a heightened focus on risk management. If not carefully managed, it can create vulnerabilities, especially during periods of market stress or liquidity shocks.
For this sector, risk-taking must be intelligent and well planned, and never beyond the risk absorption capacity of the entity concerned. Liquidity and credit risks must be rigorously assessed and managed. Asset-liability mismatches, nature and tenor of the funding sources, and concentration risks all need board-level oversight which should be ably supported by robust internal controls.
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