Mumbai: The Reserve Bank of India (RBI) on Tuesday reiterated it is closely monitoring top 50 non-bank lenders, and said it has cancelled registrations of 120 NBFCs for non-compliance of norms.
According to the central bank, it has strengthened on-site supervision of non-banking financial companies (NBFCs) during the year, including greater coverage of core investment companies (CICs) and government-owned companies along with “incisive on-site supervision of smaller NBFCs".
RBI said it plans to undertake a scale-based approach to regulation of NBFCs to identify a small set of ‘systemically significant’ non-bank financiers, which can potentially impact financial stability.
It will also take steps to improve effectiveness of the supervision and monitoring of NBFCs by ascertaining the quality of implementation of Ind-AS and subsequent regulatory guidance directions. RBI also plans to promote a strong compliance and risk culture amongst non-banks, and weed-out NBFCs not compliant with its directions on maintenance of adequate net owned funds (NOF) and returns filing.
“The RBI has already advised banks and NBFCs to carry out covid-19 stress tests and take necessary remedial measures proactively," it said.
Last year in November, RBI governor Shaktikanta Das had said it is closely monitoring top 50 NBFCs, and is regularly interacting with the management of these companies to take corrective steps.
The concerns around India’s non-bank lenders date back to September 2018 when an array of defaults by Infrastructure and Leasing Financial Services Ltd (IL&FS) heavily impacted the sector. Most non-bank financiers, which do not have strong corporate parentage, have not been able to rescue themselves from the liquidity crunch.
The central bank said on Tuesday that credit demand has been ebbing away across all sectors from non-bank sources and towards the banking system.
“The unabated weakening of economic activity, coupled with deleveraging of corporate balance sheets and risk aversion by banks due to asset quality concerns, was accentuated towards the close of the year by the pandemic woes…," said RBI, adding that credit to the services sector decelerated sharply in FY20, primarily driven down by slowdown in credit growth to NBFCs, on account of concerns relating to the health of the sector.
According to RBI, with non-traditional and digital players entering the NBFC space to deliver financial services, the regulator’s aim is to strengthen the sector, maintain stability and reduce the scope for regulatory arbitrage.
“An optimal level of regulation and supervision is sought to be achieved so that the NBFC sector is financially resilient and robust, catering to financial needs of a wide variety of customers and niche sectors, and providing complementarity and competition to banks," it said.
The NBFC sector, RBI said, largely depends on market and bank borrowings, thereby creating a web of inter-linkages with banks and financial markets, and as housing finance companies (HFCs) now fall under RBI’s purview, the process of harmonising regulations assumes priority.
“A robust liquidity risk management framework is in place for NBFCs and should, in time, apply to HFCs as well, with the objective of ensuring proper governance and risk management structures, including functionally independent chief risk officer (CRO) with clearly specified role and responsibilities," it said in the annual report.
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