RBI dy guv Swaminathan calls for responsible lending at small finance banks

India's small finance banks (SFBs) should strengthen governance to ensure sustainable business growth while adopting responsible lending practices, a deputy governor at the central bank said in a speech.

"It is disheartening to come across egregious practices by some SFBs, such as charging excessive interest rates, collecting installments in advance as well as not adjusting such advance collections against loan outstanding, levying of usurious fees, etc," J. Swaminathan said in an address at a conference of directors of SFBs on Sept. 27.
 

The speech was uploaded on the Reserve Bank of India's (RBI) website on Monday.
 

The RBI has been encouraging banks to strengthen governance standards to prevent financial instability and systemic risks.

It is the board's role to provide oversight, ask the right questions and hold the management accountable for executing the bank's strategy within the agreed risk appetite, the deputy governor said.
 

The boards of small finance banks should prioritise proper succession planning for top management to avoid leadership gaps and ensure resilient management structures, Swaminathan said.
 

They should also remain vigilant for hidden and emerging risks that could jeopardise the banks' long-term success, he added.

Small finance banks should assess whether there is an over dependence on high-cost term deposits or bulk deposits from a limited number of institutions, the deputy governor said.
 

These lenders should also evaluate any substantial asset exposures that could adversely impact them if they were to sour, he said.
 

They should give out loans "judiciously" by prioritising proper credit underwriting, Swaminathan said.
 

He also urged the lenders to significantly enhance their IT resilience against possible disruptions, and flagged that in most small finance banks, the grievance redressal mechanism was "far from adequate".