Reserve Bank of India Governor Shaktikanta Das on Wednesday said increasing connectivity between banks and non-banking financial companies (NBFCs) deserves special attention.

NBFCs are large net borrowers of funds from the financial system, with their exposure to banks being the highest, Das said at a conference organized by FICCI and the Indian Banks’ Association (IBA) in Mumbai.

“Banks are also among the major underwriters of debentures and commercial papers issued by NBFCs. NBFCs also have lending relationships with multiple banks at the same time. It goes without saying that such concentrated compounds can pose a risk of infection,” says the RBI governor.

According to Das, although banks are well capitalized, they need to constantly assess their exposure to NBFCs and the exposure of individual NBFCs to multiple banks.

NBFCs, on their part, should focus on diversifying their funding sources and reducing over-reliance on bank funding, says the RBI governor.

These comments come days after the banking regulator increased consumer credit exposure risk weights of banks and NBFCs by 25 percentage points to 125%. Higher risk weight means banks and NBFCs will have to provide additional capital for retail loans.

“We also recently announced some macro-prudential measures in the overall interest of sustainability. These measures are preventive in nature. They are calibrated and targeted. It may be important to note that key growth drivers such as loans for housing, vehicles and the MSME sector have been exempted from these measures,” says the RBI governor.

This says that banks and NBFCs would be wise to take certain precautionary measures. “As credit growth accelerates in the current period, banks and NBFCs can exercise due diligence to ensure that credit growth at the aggregate, sector and sub-sector levels remains sustainable and all forms of exuberance are avoided,” he said.

The expansion of the loan portfolio itself and its pricing should be carried out in accordance with the intended risks, explains Das. “Banks and NBFCs also need to further strengthen their asset-liability management. They may pay more attention to their liabilities side. In certain cases, we have observed an increasing reliance on short-term bulk deposits with high costs over the life of the loans, both in retail and corporate loans becoming longer and longer,” he adds.

“We live in extremely uncertain times in an interconnected world. New risks emerge from time to time. New sources of risk are also emerging. In such a scenario, further building resilience would be the best insurance against shocks and uncertainties,” says Das.

He stressed that banks, NBFCs and other financial companies need to continue to stress test their books. “In fact, there is much to suggest that companies in the real sector also subject their businesses and balance sheets to a stress test. Many of them may already be doing this, but it would be desirable for many more to do so too,” says Das.