Reserve Bank of India is monitoring and engaging with banks to create additional provisions for instances of evergreening of loans or higher delinquencies in certain loans pockets, said Deputy Governor Rajeshwar Rao.

“That is monitored through the supervisory process, and if there are instances, we ask the banks to create additional provisions and that they have to disclose also, in terms of their divergences, etc,” said Rao.

While delinquencies in unsecured retail loans have risen, growth has also been high, for which the RBI monitors and engages with banks on an ongoing basis, he added on the sidelines of the Gatekeepers of Governance Summit organised by Excellence Enablers on Thursday.

While the exponential rise in digital lending post the pandemic has led to an increase in scale and velocity of credit, it has also raised a host of business conduct issues.

“The pace with which newer business models, players and products are coming up, with such entities often exploiting the gaps in existing regulations or conducting business operations that fall in a regulatory grey area, continues to be a challenge.” These include business models that are built to challenge the regulatory perimeters, aggressive marketing strategies, exploitative customer and recovery practices, and outsourcing of key activities such as underwriting and recovery.

“To control the irrational exuberance in the financial sector, there is need for a regulator who sets the boundaries and also enforces them for ensuring a sound and robust set of financial institutions and there by promotes financial stability,” Rao said adding that balancing innovation and stability is challenging as often the “pace of change outstrips the agility of the regulators”.

Pointing out other risks such as climate change, technological advancements, social media and internet banking, and customer and data safety, he said that organisations need to invest in robust data governance frameworks, consider the environmental impact of their actions while managing credit flow, the flow of credit, ensure constant and effective supervision, and monitor and prevent spread of misinformation over social media.

The RBI, on its part, has become more nimble in its approach, is ensuring that regulations are forward looking, proactive, data-driven, impact assessment oriented and are more consultative and collaborative.

“RBI, as a matter of policy, has been gradually giving banks greater operational freedom to conduct their business operations within the overarching regulatory framework. We are thus moving at a good pace towards making our regulations increasingly principle-based,” said Rao.

He added that the central bank is following the principle of “same activity, same risk, same regulation”, which is reflected in the norms on Digital lending, first loss default guarantee (FLDG) and microfinance sector.

While this encourages a level-playing field, this needs to be counter balanced by ensuring regulations that are proportionate to the risks posed by the firm to the financial system he said, adding that establishing a level playing field for market participants is an important objective for regulators but not the “overriding one”.