NBFC crisis: RBI likely to get more regulatory powers

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Updated: July 2, 2019 7:02:37 AM

Earlier, the central bank has taken steps to enhance its supervision of NBFCs, such as increasing the periodicity of monitoring their books to 12 months from 18 months.

RBI, RBI powers, non-banking financial companies, NBFCs, supervisory powers, Reserve Bank of India Act, bankingFor its part, however, the finance ministry had asserted that the RBI had adequate supervisory power over state-run banks. (Reuters)

The government is looking into a proposal from the Reserve Bank of India (RBI) to enhance its regulatory powers with respect to non-banking financial companies (NBFCs) through the legislative route, finance minister Nirmala Sitharaman told Parliament on Monday.

“The government has received a proposal from RBI to strengthen RBI’s regulatory and supervisory powers under the Reserve Bank of India Act, 1934, and the same is under consideration,” she said in a written response to a member of Parliament’s (MP) queries on the liquidity crisis in the NBFC sector.

The FM ruled out any possibility of the government recapitalising private NBFCs while responding to a query on whether the government plans to recapitalise struggling NBFCs like Infrastructure Leasing & Financial Services (IL&FS) and Dewan Housing Finance (DHFL).

NBFCs are regulated and supervised by the central bank as per powers vested in it under the provisions contained in Chapter IIIB of the Reserve Bank of India Act. The RBI’s proposal to allow it to wield greater regulatory and supervisory powers over non-banks is in line with its own observations in the June 2019 edition of the Financial Stability Report (FSR), released last week. It cautioned that any contagion arising from the insolvency of any large NBFC or housing finance company (HFC) could result in losses comparable to those caused by the big banks. “Solvency contagion losses to the banking system due to idiosyncratic HFC/NBFC failure show that the failure of largest of these can cause losses comparable to those caused by the big banks, underscoring the need for greater surveillance over large HFCs/NBFCs,” RBI had said in the report.

Earlier, the central bank has taken steps to enhance its supervision of NBFCs, such as increasing the periodicity of monitoring their books to 12 months from 18 months. NBFCs with assets over Rs 5,000 crore have been asked to appoint a chief risk officer to improve their standards of risk management.

Last year, the RBI under then governor Urjit Patel had asserted that regulation of banks must also be ownership-neutral, stressing the need for greater power for the central bank to effectively regulate public-sector banks. For its part, however, the finance ministry had asserted that the RBI had adequate supervisory power over state-run banks.

In order to ease the liquidity crunch NBFCs have been facing since some IL&FS entities defaulted in mid-2018, RBI has eased securitisation norms for NBFCs so that they can more readily liquidate their asset pools. It also permitted banks to provide partial credit enhancement for systemically important non-deposit accepting NBFCs (NBFCs-ND-SI) and reduced the minimum average maturity requirement for external commercial borrowings in the infrastructure space raised by eligible borrowers to three years from five years earlier.

There were 9,659 NBFCs registered with the RBI as on March 31, 2019, of which 88 were deposit-accepting (NBFCs-D) and 263 NBFCs-ND-SI. All NBFCs-D and NBFCs-ND-SI are subject to prudential regulations, such as capital adequacy requirements and provisioning norms, along with reporting requirements.

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