RBI Deputy Governor Cautions Small Finance Banks On High Cost Deposits

Mumbai, Oct 1 (KNN) In a pointed address to the financial sector, Deputy Governor of the Reserve Bank of India (RBI), Swaminathan J, has urged small finance banks (SFBs) to critically evaluate their reliance on high-cost deposits and reconsider their operational practices to ensure long-term stability. 

Speaking at a recent conference, Swaminathan emphasized the importance of SFBs in driving inclusive growth and providing financial services to underserved populations. However, he raised alarms over some concerning trends within the sector.

Swaminathan highlighted the potential pitfalls of overdependence on high-cost term deposits and bulk deposits sourced from a limited number of institutions. He warned that such practices could jeopardise the stability of these banks in the long run. 

"The expectation behind the licensing of SFBs was that they would play a crucial role in fostering entrepreneurship and supporting economic progress," he stated, stressing that sustainability in funding sources is vital for these banks to fulfill their mandate effectively.

Moreover, the deputy governor cautioned against the imposition of high-interest rates and usurious fees on borrowers. He pointed out that some SFBs have been reported to charge excessive interest rates and to collect loan instalments in advance without adjusting them against the outstanding amounts. 

"It is disheartening to come across egregious practices by some SFBs," Swaminathan remarked, referring to these exploitative tactics as detrimental to the very populations SFBs are meant to serve.

Swaminathan urged the banks to adopt innovative technologies, such as the Unified Lending Interface, to enhance efficiency and provide cost-effective services. 

By leveraging technological advancements, SFBs can streamline operations and improve accessibility for their clients, thus fulfilling their role in promoting inclusive financial growth.

In addition to financial practices, Swaminathan underscored the need for improved grievance redressal mechanisms within SFBs. He noted that many institutions are lacking adequate processes to address customer complaints, which can erode trust and impede growth. 

"The grievance redressal mechanism is far from adequate in most SFBs," he added, highlighting the urgent need for banks to prioritize customer service.

As SFBs navigate the complexities of a rapidly changing financial landscape, the RBI’s guidance a

ims to promote a more stable and equitable banking environment. The call for sustainable practices and inclusive growth aligns with broader objectives of fostering economic development and ensuring that all segments of society have access to essential financial services.

(KNN Bureau)