In an attempt to enhance oversight of regulated entities, Reserve Bank of India will use scale-based approach factors in systemic risk contribution while regulating non-banking finance companies (NBFCs). The regulator will also prescribe norms for dividend distribution by NBFCs.
Also, as a step to strengthen audit systems, the financial sector regulator will issue norms for large Urban Cooperative Banks (UCBs) and NBFCs to adopt Risk Based Internal Audit.
In regulatory measures announced along with monetary policy review, RBI said it will harmonise guidelines for appointing statutory auditors for commercial banks, UCBs and NBFCs.
RBI is bringing in the standard of supervision of UCBs and NBFCs proportionately at par with that for commercial banks to further the goal of unified supervisory function.
Raj Kiran Rai G, Chairman, IBA & MD & CEO, Union Bank of India, said steps like scale-based regulatory approach for NBFCs, Risk based internal audit for UCBs and NBFCs would help to improve the regulatory and supervisory mechanisms.
Further, the interlinkages between these segments requires that all constituents of the market follow robust mechanism to ensure financial stability, he added.
RBI said there has been significant increase in size and inter-connectedness of the NBFC sector. There is, therefore, a need to review the regulatory framework in line with the changing risk profile of NBFCs.
At present, regulatory regime governing the NBFC sector is built on the principle of proportionality such that adequate operational flexibility is available to the sector through calibrated regulatory measures. RBI will release a Discussion Paper in this regard before January 15, 2021 for public comments.
About dividend distribution policy of NBFCs, RBI said unlike banks, currently there are no guidelines for distribution of dividend by NBFCs. Having norms for dividend distribution by finance companies has become necessary due to their increasing significance in the financial system and their interlinkages with different segments.
Different categories of NBFCs would be allowed to declare dividend as per a matrix of parameters, subject to a set of generic conditions. It would shortly issue a draft circular for public comments.
As for the Internal Audit function, RBI said it was as the third line of defence, which needs to be strengthened in UCBs and NBFCs. Risk Based Internal Audit (RBIA) was mandated by RBI for commercial banks in 2002.
It has now been decided to issue guidelines to large UCBs and NBFCs on adoption of RBIA. This will enable the creation of independent risk focussed internal audit system.
RBI will harmonise guidelines on appointment of Statutory Auditors for commercial banks, UCBs and NBFCs to enable Supervised Entities to appoint the audit firms as per their needs in a timely, transparent and effective manner. This is expected to improve the quality of financial reporting of SEs. Guidelines in this regard will be issued separately.
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