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RBI Probes Shadow Banks' Risky Lending Practices
4 Mar
Summary
- RBI questions NBFCs on lending to borrowers who already defaulted.
- Lenders must have board-approved policy for new loans to defaulters.
- Practice of evergreening hides the extent of sticky loans.
The Reserve Bank of India (RBI) is actively investigating the lending strategies of several non-banking finance companies (NBFCs), with at least three facing scrutiny for their policies on extending new credit to borrowers who have previously defaulted. This concern was raised during routine annual inspections by central bank officials.
RBI's core requirement is that NBFCs must establish a board-approved policy to justify any new loans granted to customers with existing overdue obligations, even if these are not yet categorized as non-performing assets (NPAs). Inspectors have identified instances where borrowers with defaulted vehicle loans have received disbursements for other products like home loans.
The central bank is not prohibiting NBFCs from offering different loan products to such customers but emphasizes the necessity for a clear policy. This policy should outline the specific circumstances under which new loans are disbursed and detail the safeguards in place to prevent 'evergreening,' a practice that inflates asset books by extending new loans to cover payments on failing older ones.
This stricter oversight is expected to extend to other comparable NBFCs with a net worth exceeding Rs 250 crore, who are mandated to adhere to the Indian Accounting Standards (IndAS). IndAS employs a more rigorous, principle-based approach focusing on economic value, which necessitates provisioning for potential credit losses earlier in the loan lifecycle, even before an asset becomes an NPA.
