REGULATING NON-BANKING

This role is, perhaps, the most unheralded aspect of our activities, yet it remains among the most critical. This includes ensuring credit availability to the productive sectors of the economy, establishing institutions designed to build the country’s financial infrastructure, expanding access to affordable financial services and promoting financial education and literacy.

Overview

India has financial institutions which are not banks but which accept deposits and extend credit like banks. These are called Non-Banking Financial Companies (NBFCs) in India.
NBFCs in India include not just the finance companies that the general public is largely familiar with; the term also entails wider group of companies that are engaged in investment business, insurance, chit fund, nidhi, merchant banking, stock broking, alternative investments, etc., as their principal business. All are though not under the regulatory purview of the Reserve Bank.
At end-March 2017, there were 11,522 NBFCs registered with the Reserve Bank, of which 178 were NBFCs-D and 220 were NBFCs-ND-SI. The share of NBFCs in terms of assets in total financial sector is 8.3 per cent as on 2016-17

Bringing diversity in financial sector

Regulating NBFCs

In the wake of failure of several banks in the late 1950s and early 1960s in India, large number of ordinary depositors lost their money. At this time, the Reserve Bank did note that there were deposit taking activities undertaken by non-banking companies. Though they were not systemically as important as the banks, the Reserve Bank initiated regulating them, as they had the potential to cause pain to their depositors. These institutions have thus been under the regulatory oversight of the Reserve Bank of India since 1963. Since then regulation has generally kept pace with the dynamism displayed by the sector. Later in 1996, in the wake of the failure of a big NBFC, the Reserve Bank tightened the regulatory structure over the NBFCs, with rigorous registration requirements, enhanced reporting and supervision. The Reserve Bank also decided that no additional NBFC will be permitted to raise deposits from the public. Further, in 1999 capital requirement for fresh registration was enhanced from `25 lakh to `200 lakh. Later when the NBFCs sourced their funding heavily from the banking system, it raised systemic risk issues. At the same time, their growing size and interconnectedness also raise concerns on financial stability. Sensing this, the Reserve Bank brought asset side prudential regulations onto the NBFCs. The Reserve Bank’s endeavour has been to streamline NBFC regulation, address the risks posed by them to financial stability, address depositors’ and customers’ interests, address regulatory arbitrage and help the sector grow in a healthy and efficient manner.
Some of the regulatory measures include identifying systemically important non-deposit taking NBFCs as those with asset size of ‘100 crore and above in the year 2006 and bringing them under stricter prudential norms (CRAR and exposure norms), issuing guidelines on Fair Practices Code, aligning the guidelines on restructuring and securitisation with that of banks, permitting NBFCs-ND-SI to issue perpetual debt instruments etc. Recently, in November 2014, the entire regulatory framework was reviewed with a view to transitioning, over time, to an activity based regulation of NBFCs. As a first step in this direction, certain changes to the regulatory framework are sought to be made to a) address risks wherever they exist, b) address regulatory gaps and arbitrage arising from differential regulations, both within the sector as well as vis-a-vis other financial institutions, c) harmonise and simplify regulations to facilitate a smoother compliance culture among NBFCs, and d) strengthen governance standards. Threshold for systemic significance has been redefined as Rs. 500 crore from the extant Rs. 100 crore in assets. Systemically important NBFCs along with deposit taking NBFCs would be subject to inter alia, higher minimum Tier 1 capital, higher corporate governance standards and also stricter asset classification norms.

The challenges

Legal Framework

Building a heterogeneous banking system

It is the constant endeavour of the Reserve Bank to enable prudential growth of the sector, keeping in view the multiple objectives of financial stability, consumer and depositor protection, and need for more players in the financial market, addressing regulatory arbitrage concerns while not forgetting the uniqueness of the NBFC sector. The Reserve Bank is, at present, reviewing the regulatory framework for NBFCs.