RBI deputy govenor, Usha Thorat warned banks that there has been a heavy rise in lending by non banking finance companies (NBFCs) to corporates which may lead to the formation of an asset bubble.

Asset bubble also known as asset inflation arises when the prices of assets inflate heavily due to excess demand.

Recent data suggest that NBFCs have managed to match levels with banks in lending to corporates, said Thorat.

"Excessive borrowings beyond the need of production and investment can lead to potential asset bubbles and deterioration of credit quality," Thorat said.

It has been observed that lending by NBFCs has taken a toll after banks stepped into base rate system of lending from July 1, marking an end to sub PLR lending. This has led to increase in cost of funds for many companies thereby compelling them to seek cheaper sources of loans.

"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 said.

She has also warned banks against relying too much on rating agencies saying that their ratings may not make full assessment of systematic risks or uncontrollable risks.