RBI Intensifying Scrutiny On Lending 'Exuberance': Report

While no formal enforcement measures have been taken, the report revealed that the RBI is actively tightening supervision and prompting proactive measures from financial institutions

The Reserve Bank of India (RBI) is reportedly intensifying its efforts to address "exuberance" in retail lending, extending its focus to new sectors such as mortgage-linked "top-up" loans. Concerns about escalating risks to the financial system have prompted the central bank to enhance its oversight of the industry and encourage individual lenders to curtail credit in areas deemed high-risk, according to a report by the news agency Reuters citing sources. 

While no formal enforcement measures have been taken, the report revealed that the RBI is actively tightening supervision and prompting proactive measures from financial institutions.

Over the last six months, the RBI has implemented several measures aimed at curbing retail lending by both banks and non-bank financial institutions. Additionally, the central bank has issued public warnings cautioning against "all forms of exuberance" in lending practices.

However, the heightened scrutiny, essentially serving as a warning for financial institutions, represents a shift for the central bank. As recently as September, the RBI stated that India's credit expansion did not indicate the emergence of systemic stress.

"RBI is now adopting a four-step approach to supervision - monitoring, warning, penalising, and then taking action. They aim to provide entities with an opportunity to rectify their course based on public or specific warnings, but also take action when necessary,” said the report, citing sources.

Initially, the RBI typically employs moral persuasion tactics such as speeches, discussions with bank executives, and individual meetings to encourage banks to address concerns before resorting to more forceful enforcement measures.

According to the report, the RBI is cautioning lenders about mortgage top-ups, advising them on the risks associated with algorithm-based credit models, and encouraging some institutions to moderate co-lending.

Meanwhile, in December, RBI Governor Shaktikanta Das emphasised that the central bank doesn't wait for the house to catch fire before taking action when discussing the stricter regulations announced for personal loans.