RBI governor cautions micro lenders and banks against excessive risk in consumer loans.

India’s central bank Governor, Shaktikanta Das, issued a warning to micro lenders, urging them to assess the affordability of loans for lower-income consumers, particularly in cases where high net interest margins are observed. While interest rates for microfinance institutions (MFIs) are regulated, Das emphasized the need for judicious use of flexibility in setting interest rates.

Addressing an event in Mumbai, Das cautioned both banks and non-bank finance companies (NBFCs) against “all forms of exuberance” in the wake of recent tightening of rules for consumer loans. Despite the acceleration in credit growth, the governor stressed the importance of ensuring that lending to individual categories remains sustainable.

Last week, the Reserve Bank of India (RBI) increased capital requirements for banks offering personal loans and lending through NBFCs, expressing concerns about potential risks associated with the growing demand for small-ticket consumer credit.

Das reassured that the measures taken were preemptive, calibrated, and targeted. He also urged caution against relying solely on pre-set algorithms for lending decisions, emphasizing the need for careful assessment, especially in light of new lending models.

While the RBI did not tighten capital norms for home loans, vehicle loans, and gold loans, Das highlighted the importance of vigilance regarding the inter-connectedness between banks and NBFCs. He advised non-bank lenders to diversify their sources of funding to mitigate potential risks.