The Reserve Bank of India’s decision to take several steps that are aimed at encouraging banks to lend to non-banking finance companies could increase risks in the financial sector, rating agency Fitch said.
Risks in India’s banking sector may rise as a result of the central bank’s recent steps encouraging banks to lend more to non-banking financial institutions (NBFIs) and retail borrowers, Fitch Ratings said.
These measures could push up banking sector risk if they make banks accept higher credit risk than they previously had the appetite for, Fitch said.
India’s constant nudging of banks to lend more to non-banks is in contrast to the global trend of authorities trying to break the linkages between banks and NBFCs, it said.
“India’s overarching approach across the financial system is aimed at achieving a more inclusive financial system in which bank savings can support lending to parts of the economy that are beyond the banks’ distribution network or risk appetite. However, it increases the potential of risks in the NBFI sector spilling over to banks, exacerbated by the limited capacity of India’s capital markets to provide extra funding to NBFIs,” the report added.
