Das flags non-bank expansion risk in financial intermediation

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Last Updated16/09/2024

Governor Shaktikanta Das on Friday said that the proliferation of non-bank institutions in financial intermediation may create risks to financial stability due to their size, complexity and interconnectedness with the domestic and global financial systems.

RBI Governor Shaktikanta Das raised concerns about the growing role of non-bank financial institutions (NBFIs) in the global financial system, warning of risks to financial stability due to their size, complexity, and interconnectedness.
He spoke at the Future of Finance Forum 2024 organized by the Bretton Woods Committee in Singapore, focusing on emerging global financial stability risks.

Vulnerabilities in Advanced Economies: Das pointed out that in recent years, NBFIs in advanced economies have shown signs of vulnerability, leading to market dysfunction. Their hidden leverage and liquidity mismatches could amplify shocks and propagate strains throughout the financial system.
Interconnectedness: Due to their increasing connections with the domestic and global financial systems, NBFIs could serve as a conduit for financial instability, impacting a wide array of market participants.

Another area of concern highlighted by Das was the exponential rise of private credit as a major source of corporate financing, particularly for middle-market firms with low or negative earnings and high leverage.
- Shifts in Underwriting Standards: With private credit growing fourfold over the last decade, competition with investment banks on larger deals could result in weaker underwriting standards, potentially increasing the probability of credit losses.
- Systemic Vulnerabilities: The opacity and interconnectedness of private credit with banks and NBFIs pose systemic risks, making existing risk management models increasingly obsolete.

Governor Das also flagged stress in the global commercial real estate (CRE) sector, warning that banks with large CRE exposures are highly sensitive to potential losses.
- High CRE Coverage Ratios: Many banks maintain high CRE coverage ratios in their loan portfolios, making them vulnerable to liquidity squeezes in case of shocks.
- Investor Confidence: Das cautioned that liquidity squeezes and short-seller activity could erode investor confidence in banks with significant CRE exposure, threatening broader systemic stability.