RBI deputy govenor, Usha Thorat has warned banks that with a sharp increase in lending by non banking finance companies (NBFCs) to corporates it is liekly to lead to the creation of an asset bubble.
Asset bubble or asset inflation occurs when the prices of assets go up sharply because of to exorbitant demand.
Latest data shows that NBFCs have compete with levels of banks in lending to corporates, according to Thorat.
She said, “Excessive borrowings beyond the need of production and investment can lead to potential asset bubbles and deterioration of credit quality”.
It has been seen that lending by NBFCs has shot up after banks moved into base rate method of lending from July 1, denoting an end to sub PLR lending. This has hiked the cost of funds for many companies thus forcing them to opt for cheaper sources of funds.
She added, “When we had looked at the recent data on the flow of funds to the commercial sector we find that the source of funding from non-banks has been equal to if not more than from banks”.
She has also warned banks against depending excessively on rating agencies by saying that their ratings may not entirely assess the systematic risks or uncontrollable risks.
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