Proposed changes to NBFI regulatory framework to enhance sector stability: Fitch Ratings

NEW DELHI: Fitch Ratings on Wednesday said the proposed changes to the regulatory framework for non-bank financial institutions (NBFIs) are likely to enhance sector's stability and improve its funding environment.

"We believe that the reforms would preserve NBFIs' niche business models and could improve the funding environment for some entities by strengthening investor confidence in the sector," it said.

The proposed changes to India's regulatory framework for non-bank financial institutions (NBFIs) unveiled in the Reserve Bank of India's (RBI) discussion paper on January 22 are likely to enhance the sector's stability, it added.

For the sector as a whole, the proposed measures should "strengthen governance and risk management, although we do not view these areas as major credit weaknesses for Fitch-rated Indian NBFIs", the rating agency said.

"The longer-term impact of such reform would also depend on its implementation, and robust regulatory and market scrutiny will be key in holding entities to higher standards," it noted.

Larger entities face enhanced disclosure requirements, and tighter risk and capital management requirements, which would likely be credit positive, Fitch said, adding that the scale-based regulations reflect calls for closer supervision of large NBFIs that have grown more systemically significant.

"We view proposals to appoint auditors by rotation as well as requirements to disclose information such as the incidence of covenant breaches and asset quality divergence as credit positive," the agency explained.

"Unlike banks, many NBFIs have appointed the same auditors for many years. In addition, lending to directors and senior employees would be restricted, reducing governance risks," Fitch added.

Fitch said the proposed changes in NBFI regulatory framework would not significantly affect business models, but some lending activities could be curtailed by the suggested changes, especially in real estate.

The RBI is looking to restrain lending to early-stage development projects that have not yet received regulatory approval, and has proposed added internal controls for lending against land acquisition, the agency said, adding that some entities have built up exposures to these risky areas in recent years, which have become a point of vulnerability for the sector. The suggested new rules could curb a further run-up in such exposures in the longer term, it said.