RBI Raises Alarm Over Small Finance Banks’ Heavy Dependence on Costly Deposits and Credit Risks
The Reserve Bank of India (RBI) has expressed worry about small finance banks relying too much on expensive term deposits from a small group of institutions. The RBI also cautioned these banks about the risks of defaults due to poor credit assessment practices.
During a meeting with the CEOs of small finance banks, RBI Deputy Governor Swaminathan J highlighted additional concerns such as cyber threats, inadequate customer service, and high charges on banking services.
“Many banks are venturing into unsecured retail lending, hoping to benefit from diversifying their portfolios. However, this carries a hidden risk, especially during economic downturns. In tough times, the credit quality of many borrowers can worsen, leading to increased default rates,” Swaminathan explained.
He emphasized the need for thorough credit assessments, saying it’s essential to evaluate borrowers’ creditworthiness carefully instead of just relying on automated systems or algorithms.
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