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RBI paper alleviates fears about restrictive NBFC norms

The Reserve Bank of India (RBI) has released a discussion paper on non-banking financial companies (NBFCs) that aims to initiate a scale-based regulatory framework. The objective of this discussion paper is to revisit the current framework and recommend appropriate regulatory measures for a resilient financial system. This is a step in the right direction in the mid- to long-term with an increase in transparency as well as sustainable growth in a calibrated manner for NBFCs.

* RBI outlines importance of NBFCs in last-mile connectivity: The RBI has clearly articulated the importance of NBFCs in serving the niche sectors/geographies. The apex bank is committed to preserving the uniqueness of the model to ensure continued flexibility of their operations in the last mile of credit delivery. Lighter and differential regulation has provided operational flexibility to NBFCs and helped them develop sectoral and geographical expertise. The extant regulatory arbitrage enjoyed by NBFCs is a calculated move from the Reserve Bank rather than by default.

* No mention of SLR and CRR for now; regulatory arbitrage to continue: The biggest fear among investors had been the introduction of SLR/CRR for NBFCs, resulting in negative carry over their balances along with a cap over growth opportunities; however, there is no such mention from the Reserve Bank for now.

* Sample for identification of NBFCs in upper layer; large, listed NBFCs would anyhow be part of upper layer: The paper clearly states that the moving stock of NBFCs to be included in the upper layer classification whereby a sample of NBFCs, proxy for the NBFC sector, will be included here. However, the sample will exclude the top-10 NBFCs (as per asset size), as they will automatically fall in the upper layer of regulation.

* Introduction of some new Regulatory Framework from CET1 to higher Standard asset provisioning: In addition to the regulations applicable to NBFC-ML, a set of additional regulations will apply to NBFC-UL.

      * CET 1 at 9% could be introduced for NBFC-UL to enhance the quality of regulatory capital. Our base calculation suggests that most NBFCs under our coverage universe fulfil this condition.

     * NBFC-UL will also be subjected to a leverage requirement to ensure that growth of the NBFC is supported by adequate capital; negative for players like LICHF, which run business over elevated leverage.

     * Differential standard asset provisioning: These are over and above expected credit losses under IND-AS. During pandemic, most NBFCs have built strong buffer provisions, helping them shore up standard asset provisions initially.

* Implementation of Core Banking Solutions for NBFCs – moving toward digital advancement: It is suggested that NBFCs with 10 and more branches must adopt the core banking solution (CBS). Banks have implemented CBS, which has brought significant benefits, including transparency, efficiency, reducing the scope for fraudulent flow and enhanced customer service experiences.

* Government-promoted NBFCs to remain exempt for now; advantage PFC/REC: As per the circular on ‘Withdrawal of Exemptions Granted to Government Owned NBFCs’ dated May 31, 2018, the government-owned NBFCs are still in the transition period. It is, therefore, proposed not to subject these NBFCs to upper layer regulatory framework. PFC, REC, IRFC, etc. may be exempted from these norms for a while.

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