Unethical Lending Practices: RBI Warns Banks

Mumbai, Jul 29 (PTI) Reserve Bank of India Deputy Governor Swaminathan J has said intense competitive pressures and a desire to project short-term success are making some banks and non-banking finance companies adopt unethical practices.

Speaking at private sector lender Karur Vyasya Bank's foundation day event in Tamil Nadu's Karur last Friday, he said managements of such lenders feel the "ends justify the means", and warned that such practices risk eroding the public's trust in the integrity of the banking system.

"Driven by intense competitive pressures and a desire to project short-term success, the management of certain banks and NBFCs appears to believe that the ends justify the means," the DG said in the speech, which was posted by the central bank on its website on Tuesday.

Some lenders are resorting to practices such as creative accounting and liberal interpretations of regulations, and inadequate internal controls are being "normalised" in some boardrooms, which lead to supervisory interventions, he said.

"It is important to pursue growth with systems, people, and processes that are aligned and rooted in ethical practices -- from the boardroom to the branch," the commercial banker-turned-regulator said.

Bank boards and managements have a responsibility to deepen the hard-earned trust through responsive service, reliable systems, and responsible leadership, he said.

A bank's reputation, once established, becomes one of its most valuable assets. In an environment of rising competition and evolving customer expectations, the way forward lies in building upon a customer-centric approach that fosters trust, loyalty, and long-term value, the RBI DG said.

It is not enough to meet regulatory thresholds or improve headline numbers, he said, adding that how the financial resources are deployed is important. "Every rupee must carry intent, not just interest," he said.


There is a need to translate strategy into action on the ground, Swaminathan said, adding that the strongest frameworks -- whether related to risk, credit, technology, or compliance -- are only as effective as their execution at the customer interface.

There is a need for clarity, coordination, and accountability while undertaking initiatives like launching a new product, entering a new geography, or rolling out a compliance reform, he added.

The DG said there is a need to match the speed and scale of digital adoption with equally strong investments in cybersecurity, data governance, and ethical safeguards, and added that technology gaps, if not addressed in time, can become points of systemic vulnerability as has been shown by recent events.

"Technology must never outrun the organisation's capacity to manage it," he said, asking for the top managements at lenders to ensure that risk, compliance, and internal audit functions have the resources and visibility needed to keep pace.

Swaminathan also said timing is very important for banks, adding that the contextual awareness on aspects like economic cycles, interest rate shifts, regulatory changes, geopolitical developments, and even climate events should influence when and how decisions should be made.

Recalling that the Karur Vyasya Bank (KVB) founders decided to set up a bank in 1916 in the midst of the first World War as a bold and timely decision, Swaminathan said history rewards institutions that act early, rather than those that act perfectly.

"The same sense of timing and responsiveness must now guide the bank as it enters its next phase," he said, making a case to look beyond geographical concentration to lenders.

"For a bank with a rich heritage and legacy like KVB, the ability to balance deep local insight with broader diversification will be key to navigating the next phase of growth," he said.