No systemic risk in banking sector: Jio Financial Services' KV Kamath

Money leaving the banking system and entering the markets through unsecured lending, cautions Kamath at the Business Standard BFSI Insight Summit

There is no reason to anticipate any systemic risk in the Indian banking sector, with banks appearing healthier than ever, said KV Kamath, independent director and non-executive chairman of Jio Financial Services, on Friday at the Business Standard BFSI Insight Summit in Mumbai.

 

In his fireside chat with Tamal Bandyopadhyay, Kamath nonetheless emphasised that the systemic caution shown by the Reserve Bank of India (RBI) is “entirely warranted”.

 

Highlighting the strong health of Indian banks, Kamath pointed to the top-four banks reporting returns on equity of 16-20 per cent in the last quarter—levels previously unheard of. He maintained that the Indian banking system is currently better positioned than it has been in the past 50 years.

 

Explaining that lending activity goes through cycles and that pain is inevitable at some point, Kamath noted that no such pain is reflected in the current quarter’s numbers. He added that he did not see any change in the banking sector’s cycle at present.

 

Kamath made these comments in response to a question from Bandyopadhyay about whether the stress related to unsecured lending was confined to the non-banking financial company (NBFC) sector or had also impacted the broader banking sector.

 

Addressing the health of the NBFC sector, Kamath observed signs of a “pyramid” forming, with many borrowers taking multiple loans—often to repay earlier borrowings—while still seeking additional credit.

 

Acknowledging the situation, Kamath said the RBI had raised risk weights for unsecured loans and signalled concern, adding, “They were right on time.”

 

Kamath noted that financial technology (fintech) firms are lending even to borrowers with a credit score of 550, while traditional bankers typically lend to those with scores of 700 to 750.

 

He underscored that recent regulatory measures for the NBFC sector were “absolutely warranted,” praising the regulator’s proactive stance.

 

When asked about a potential structural change in India’s financial landscape, Kamath agreed that it was underway, describing it as a “slow shift”.

 

He explained that increased access to financial products, driven by technology and systematic investment plans (SIPs), is leading to the financialisation of savings—a trend that was not seen earlier.

 

However, Kamath expressed concern about the flow of funds raised through personal and unsecured loans entering the markets.

 

Agreeing with Bandyopadhyay that money is leaving the banking system and entering the markets, Kamath cited RBI Governor Shaktikanta Das’s warning about the risks of retail participation in the Futures and Options (F&O) market. He estimated that between Rs 1.5 trillion to 1.7 trillion has been lost in the markets due to such activities, with unsecured lending accounting for nearly the entire amount.

 

Kamath stated that this is why the RBI was correct in raising concerns about unsecured lending.

 

“The RBI was absolutely right in raising a red flag on unsecured lending, increasing risk weights, and advising lenders to scrutinise the borrower’s end-use of funds,” Kamath said, commending the RBI for acting at the right time.