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The Significance of Balanced Growth Insights from RBI Governor

The Significance of Balanced Growth Insights from RBI Governor

Growth is important, but not at cost of unacceptable risks says RBI governor, Prioritizing Financial Resilience: RBI Governor’s Advice on Risk Management.

Banks and non-banking finance companies (NBFCs) must avoid “unacceptable risks” to achieve growth and should implement robust risk mitigation strategies, according to Reserve Bank of India (RBI) Governor Shaktikanta Das. During his address at the Global Conference on Financial Resilience in Mumbai, Das emphasized the importance of vigilance in business models to ensure the long-term stability of the financial system.

The Importance of Risk Mitigation in Financial Growth

Das highlighted that while profitability and growth are essential, they often conceal vulnerabilities that may not be immediately visible. Both regulated entities and supervisors must remain alert to potential risks within their business models. The pursuit of growth should not overshadow the need for comprehensive risk management.

Robust Risk Mitigation for Long-term Success

The governor stressed that robust risk mitigation frameworks are crucial for the sustained success and resilience of both individual entities and the overall financial system. Effective governance is a priority for the RBI, which has imposed business restrictions on some entities due to significant supervisory concerns.

Governance and Supervisory Interventions

When serious issues arise within a financial entity, an RBI executive director addresses the entity’s full board, expressing the regulator’s concerns directly. Additionally, when discrepancies are found between auditors’ reports and RBI’s supervisory findings, or when material issues are inadequately addressed, the RBI engages auditors in direct discussions.

Sustainable Business Models and Root Cause Analysis

Das explained that the RBI now focuses on the sustainability of banks’ and NBFCs’ business models. The regulator conducts root cause analyses of problems and vulnerabilities, taking proactive measures whenever potential crises are identified.

Impact of Increased Risk Weights on Credit Growth

Referring to the RBI’s decision in November to increase risk weights for unsecured loans and bank loans to NBFCs, Das noted that this move effectively curtailed credit growth in these segments. The growth of unsecured loans, previously around 30% annually for credit cards, moderated to 23%. Similarly, bank lending to NBFCs decreased from 29-30% to 18%.

Preventive Measures to Mitigate Risks

The governor reiterated that timely action is crucial to prevent vulnerabilities from escalating into significant problems. The RBI acted in advance to slow down credit growth, responding to evidence of weakening underwriting standards and insufficient credit appraisals.

Conclusion

In conclusion, Governor Shaktikanta Das’s message underscores the necessity for financial entities to balance growth aspirations with stringent risk management practices. By prioritizing robust risk mitigation frameworks, the RBI aims to ensure the stability and resilience of the financial sector, safeguarding it against potential crises.

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