After remaining non-committal regarding direct intervention in the non-banking financial companies (NBFCs) sector crisis, the Reserve Bank of India (RBI) on Monday indicated that the central bank is planning a “fresh look” at the regulatory and supervisory framework of the struggling shadow banking sector.
Though the RBI had recently come out with draft guidelines for a “robust liquidity framework” for the NBFCs and RBI Governor Shaktikanta Das said that “the RBI will not hesitate to take any measure to ensure financial stability in the sector” after unveiling the monetary policy on June 6, it stopped short of speaking about reviewing the supervisory framework for the NBFC sector which has witnessed a spate of defaults and payment delays.
On Monday, however, the RBI Governor said: “We are also giving a fresh look at their regulatory and supervisory framework. It is our endeavour to have an optimal level of regulation and supervision so that the NBFC sector is financially resilient and robust.”
“The Reserve Bank will continue to monitor the activity and performance of this sector with a focus on major entities and their inter-linkages with other sectors. The Reserve Bank will not hesitate to take any required steps to maintain financial stability,” Das said at a speech delivered at the Lal Bahadur Shastri National Academy of Administration in Mussoorie on Monday.
While unveiling the bi-monthly monetary policy on June 6, Das had said: “We have been closely monitoring the performance and developments in the NBFC and HFC sectors. The RBI will not hesitate to take any measure to ensure financial stability in the sector.”
Defaults by IL&FS which has a debt of around Rs 94,000 crore had affected the entire financial sector this year. Several NBFCs have been struggling to raise funds. Liquidity woes led to payment delays by housing mortgage firm DHFL.
In Mussoorie, Das said: “To reinvigorate growth by improving investment climate, a healthy financial sector plays an important role. In this context, the Reserve Bank has accorded high policy attention to reform both banking and non-banking sectors. We have been taking several steps to strengthen the regulatory and supervisory frameworks in order to increase the resilience of the banking system. New guidelines have been issued for resolution of stressed assets, which will sustain the improvements in credit culture.”
Das had said the central bank had recently reduced the periodicity of NBFC supervision from 18 months to 12 months and is well aware of the position of top entities operating in the sector. “Individual entities themselves are resorting to various measures using market mechanisms to mobilise additional liquidity and additional resources to meet their liabilities and commitments,” he had said on June 6.
In May this year, the Central Board of the RBI decided to create a specialised supervisory and regulatory cadre within the RBI in order to strengthen the supervision and regulation of commercial banks, urban cooperative banks and non-banking financial companies.
The RBI also asked NBFCs with asset size of more than Rs 5,000 crore to appoint a Chief Risk Officer (CRO) with clearly specified role and responsibilities amid growing worries over an “imminent crisis” in the NBFC sector due to credit squeeze, overleveraging, excessive concentration, massive mismatch between assets and liabilities and misadventures by some large entities like the IL&FS group.