SFBs should adopt responsible lending practices: RBI DG Swaminathan

Reserve Bank of India (RBI) Deputy Governor Swaminathan J has directed small finance banks (SFBs) to adopt responsible lending practices as the target groups of such lenders are mainly marginalised and underserved sections of the society.

“It is disheartening to come across egregious practices by some SFBs, such as charging excessive interest rates, collecting instalments in advance as well as not adjusting such advance collections against loan outstanding, levying of usurious fees, etc. It is also observed that grievance redressal mechanism is far from adequate in most SFBs,” Swaminathan said.

He suggested that the board of these SFBs must periodically review the manner in which they are fulfilling their financial inclusion objectives as it is important to assess the true impact of the efforts on the underserved communities.

“Boards can reflect on whether the bank is genuinely reaching marginalised groups, such as low-income households, small businesses, and rural populations, and how effectively it is using technology and innovative products to bridge financial gaps, as these were the objectives of having a differentiated licensing for SFBs,” he said.

Further highlighting the importance of an effective governance framework, the deputy governor said that there needs to be a clear division of responsibilities between the board and the management. The board will take care of the overall strategic framework and ethical standard, the management will handle the execution of the board’s strategy and operations.

The boards are also expected to ensure a proper succession planning for top management. He also said that certain SFBs are yet to ensure the presence of at least two whole time directors (WTD) and urged them to expedite appointment of more WTDs.

“Having just one WTD can create potential vulnerabilities, especially in times of transition or unforeseen circumstances. Without a well-thought-out succession plan, the bank may face leadership gaps that could disrupt operations and affect strategic decision-making,” he said.

In addition, he also said that the SFBs will have to emphasise proper credit risk underwriting. While many banks have expanded into unsecured retail lending, hoping to leverage the diversification benefits it offers, there is an underlying correlation risk that becomes more pronounced during economic downturns. In such scenarios, the credit profile of a large segment of borrowers can be significantly impacted, leading to higher default rates.

While digital lending solutions have streamlined the process and made access to credit easier, on-the-ground presence for collections remains crucial. Swaminathan said that the SFBs should address the issue of cyber security and IT vulnerabilities. Being relatively new entities, SFBs have used technology to enhance their product offerings and customer service. However, with their increasing digital footprint, these banks face significant operational risks from growing cyber threats, digital frauds, and possible data breaches.