Class - BBA ll nd yr.
Subject - Financial Market & Services
Subject type - Minor ll
By AP N Jaiswal
- potential for high default rates if borrowers over-leverage or if lending standards are lax. This can lead to non-performing assets for banks and Non-Banking Financial Companies (NBFCs).
- High Indebtedness and Financial Strain: Unchecked credit can lead to excessive debt accumulation for borrowers. The RBI promotes "responsible borrowing" and "credit discipline" through its financial literacy programs.
- Systemic Vulnerabilities: Rapid, unregulated growth in consumer credit can create systemic risks for the entire financial sector. The RBI has previously "red-flagged" the surge in NBFC consumer credit and increased risk weights to ensure financial stability and capital adequacy.
- Lack of Transparency and Unfair Practices: The RBI has issued guidelines to ensure transparency in interest rates and charges, to prevent predatory practices like hidden fees or harsh recovery methods, particularly in the microfinance sector.
- Operational and Compliance Risks: Financial institutions need robust risk management frameworks and internal controls to manage consumer credit operations. Failure to adhere to regulatory norms can lead to compliance issues.
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