September 8, 2010 11:18 AM EDT
A Reserve Bank of India deputy governor on Wednesday cautioned against a sharp rise in lending activity by non-banking finance companies (NBFCs) to companies, which she said can lead to asset bubbles.
Reserve Bank of India Deputy Governor Usha Thorat also said she does not support a further increase in exposure limits for banks to an infrastructure borrower or group of such borrowers.
NBFCs have caught up with banks in lending to Indian companies, according to recent data, she said.
"Excessive borrowings beyond the need of production and investment can lead to potential asset bubbles and deterioration of credit quality," Thorat said in a speech at a banking seminar.
NBFCs source their funding from domestic capital markets and money markets as well as offshore, she noted, warning that it is difficult to monitor the end-use of funds extended by non-banking financial firms.
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Non-bank financial institutions have stepped up lending to Indian corporates since the RBI launched a new lending rate structure for banks from July 1, known as the base rate, under which banks cannot lend below that reference rate.
Consequently, the cost of funds for many companies has moved up, prodding them to seek finance at lower rates from other sources.
"When we had looked at the recent data on the flow of funds to the commercial sector we find that the source of funding from non-banks has been equal to if not more than from banks," she said in the speech.
She also warned banks against over-reliance on rating agencies, as ratings may not necessarily reflect broader systemic risks.
"Banks ought to be moving to advanced approaches with less reliance on rating agencies," she said.
"Agencies in turn have to take a holistic approach while awarding ratings, keeping in regard the tendency for end-use, asset bubbles and possible instability," she said.
Thorat is also not in favour of further relaxation of infrastructure lending norms after the RBI eased its single borrower and group borrower exposure limits earlier this year. Those rules limit a bank's lending to a single borrower or group of borrowers.
"If you look at the concentrated risk and asset-liability mismatches, any further relaxation would be imprudent," she said.
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