Mumbai: Non-bank financial corporations (NBFCs) must either become strictly regulated banks or downsize, according to Rajeshwar Rao, deputy governor in charge of bank regulation and risk tracking at the Reserve Bank of India (RBI).
Speaking at an Assocham event, Rao said there can be no “one size fits all” prescription in the regulatory approach for NBFCs. Systemically important NBFCs need to be identified and undergo a greater degree of regulation, he said.
“These non-bank financial companies should have incentives to become a commercial bank or reduce their network externalities within the financial system. This would make the financial sector robust and resilient while allowing most NBFCs to continue under the light regulation structure, “Rao added.
Rao also advocated for a calibrated and tiered regulatory framework, proportionate to the systemic importance of entities. NBFCs with significant externalities and that contribute substantially to systemic risks must be identified and subjected to a greater degree of regulation, he said.
Over the years, the flexibility that accompanied lax regulation has allowed NBFCs to serve last-mile customers. Between March 31, 2009 and March 31, 2019, total NBFC assets grew at a compound annual growth rate (CAGR) of 18.6%, while bank balance sheets grew by 10.7 %.
Links between banks and shadow lenders have deepened. At the end of March 2020, NBFCs were the largest net borrowers of funds in the financial system, of which more than half of the funds came from banks.
The collapse of an infrastructure financier in 2018, the government seizure of a mortgage lender in 2019, and the resulting cash crisis in the system revealed failures intrinsic to the NBFCs. Many NBFCs found themselves in trouble due to cash shortages due to biased asset and liability management practices with short-term loans financing long-term assets, reckless lending practices, and a lack of due diligence along with ambitious growth targets.
“It is imperative to strike a balance between regulating NBFCs more strictly and the need to provide them with the required flexibility. This will remain the cornerstone as we envision the future of NBFC regulation,” Rao said.
There are 9,601 shadow banks, of which the top 50 comprise 80% of the market share through loans.
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