The Reserve Bank of India (RBI) plans to extend the rigour of due diligence it exercises when promoters seek registration for starting non-banking finance company (NBFC) business to cases where there is a change in ownership/ control in an existing NBFC.
According to M Rajeshwar Rao, Deputy Governor, RBI, it is extremely critical that appropriate filtering mechanisms are in place to allow only the genuine and able promoters to start the business of NBFCs.
“After all, by issuing Certificate of Registration to new NBFCs, we provide them with the regulatory mandate to access public funds multiple times their net worth.
“Besides, it is necessary that NBFCs do not become conduits in money laundering and terrorist financing in any manner,” said Rao in his speech delivered at the ‘National E-Summit on Non-Banking Finance Companies’ organised by Assocham.
The Deputy Governor emphasised that while the current mechanism within RBI focusses on the above objective for companies seeking registration, there is a need to extend similar rigour of due diligence whenever there is a change in ownership/ control in an existing NBFC.
Good governance
Rao observed that ensuring good corporate governance in NBFCs is at the core of any regulatory change.
He underscored that: “This is not an easy objective to meet, as good governance is essentially an aspirational achievement for an entity and it can seldom be founded only on regulatory prescriptions.”
Good governance would be a natural outcome if promoters/owners and senior management are fundamentally ‘fit and proper’.
Rao felt that there is a need to re-prioritise the regulatory tools in the microfinance sector so that RBI’s regulations are activity-based rather than entity-based.
“After all, the core of microfinance regulation lies in customer/consumer protection,” he said.
Referring to several large microfinance institutions (MFIs) getting converted into Small Finance Banks, Rao said the share of NBFC-MFIs in the overall microfinance sector has come down to a little over 30 per cent.
“Today, we are in a situationwhere the regulatory rigour is applicable only to a small part of the microfinance sector,” he added.
Growth of NBFC sector
Rao said that between March 31, 2009, and March 31, 2019, the total assets of NBFCs grew at a compounded annual growth rate (CAGR) of 18.6 per cent, while the balance sheets of scheduled commercial banks (SCBs) grew at a CAGR of 10.7 per cent.
Consequently, the aggregate balance sheet size of NBFCs increased from 9.3 per cent to 18.6 per cent of the aggregate balance sheet size of SCBs during the corresponding period.
In absolute terms, the asset size of NBFC sector (including Housing Finance Companies), as on March 31, 2020, is ₹51.47-lakh crore.
“Over the years, the segment has grown rapidly, with a few of the large NBFCs becoming comparable in size to some of the private sector banks.” the Deputy Governor said.
As of end-March 2020-end, NBFCs have been the largest net borrowers of funds from the financial system, of which, more than half of the funds were from SCBs, followed by Asset Management Companies-Mutual Funds (AMC-MFs) and Insurance Companies.
“As the financial intermediation has shifted, so has interconnectedness. Many NBFCs now rely on banking system for funds and emergency liquidity needs.
“Therefore, it is not enough to understand and confront the vulnerabilities of the banking sector alone. The need of the hour is to understand vulnerabilities in the NBFC sector and how shocks are transmitted to or from the sector,” opined Rao.