Govt may enhance RBI powers for better supervision of NBFCs

Sources said some regulatory changes and measures relating to NBFCs sector are likely to be announced in the Union Budget slated on July 5. The RBI has already reduced the periodicity of the NBFC supervision to 12 months from 18 months earlier.

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Regulatory changes and measures likely to be announced in Budget on July 5. (Express Photo by Pradip Das)

The government is considering a proposal from the Reserve Bank of India (RBI) seeking more powers to improve its regulatory and supervisory mechanism for non-banking financial companies (NBFCs). Recent defaults by a section of NBFCs have created turbulence in the financial markets, including debt market, leading to fears that potential solvency risks at certain companies can be contagious.

Sources said some regulatory changes and measures relating to NBFCs sector are likely to be announced in the Union Budget slated on July 5. The RBI has already reduced the periodicity of the NBFC supervision to 12 months from 18 months earlier.

“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,” Union Finance Minister Nirmala Sitharaman had said in response to a query in Lok Sabha.

“RBI has informed that it is closely monitoring the liquidity position of the NBFCs and will continue to monitor the activity and performance of the

NBFC sector with a focus on major entities and their inter-linkages with other sectors,” Sitharaman said.

She also clarified the government has no plans to provide equity support to beleaguered NBFCs in the private sector. “Government, from time to time, infuses capital in public sector NBFCs based on an objective assessment of requirements. There is no proposal under consideration of the government to recapitalise private NBFCs,” she said.

The RBI has conventionally adopted light-touch regulatory approach towards NBFCs, to enable them to reach the masses through innovative financial products and service delivery mechanisms. “In light of recent developments, there is a case for having a fresh look at their regulation and supervision. It is our endeavour to have an optimal level of regulation and supervision so that the NBFC sector is financially resilient and robust,” Reserve Bank Governor Shaktikanta Das had said during a lecture in Pune on June 8.

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The central bank has taken various measures to help NBFCs tide over the recent crisis, including raising the single-borrower exposure limit for NBFCs that do not finance infrastructure to 15 per cent from 10 per cent, relaxation in minimum holding period norm to encourage securitisation of loans assets and asking NBFCs with assets of more than Rs 5,000 crore to appoint a chief risk officer.

Amid payment delays and defaults in the housing finance companies and NBFCs, the RBI in its Financial Stability Report last Thursday warned that the failure of any NBFC or HFC will act as “a solvency shock” to its lenders and solvency losses caused by these shocks can “further spread by contagion”. NBFCs depend largely on public funds such as bank borrowings, debentures and commercial papers, which account for 70 per cent of the total liabilities of the sector.

NBFCs were the largest net borrowers of funds from the financial system, with gross payables of around Rs 844,600 crore and gross receivables of around Rs 723,000 crore as on end-March 2019.

The consolidated balance sheet size of the NBFC sector grew by 20.6 per cent to Rs 28.8 lakh crore in FY19, as against an increase of 17.9 per cent to Rs 24.5 lakh crore in 2017-18. Gross NPAs of the NBFC sector as a percentage of total advances rose from 5.8 per cent in 2017-18 to 6.6 per cent in 2018-19.