‘RBI keeping close watch on systemically important NBFCs’

The Reserve Bank of India is keeping a close watch on non-banking finance companies following robust credit growth in 2014-15, even as banks witnessed a slowdown in credit offtake, said a top official.

According to R Gandhi, Deputy Governor, continuous monitoring of NBFCs is still required in order to detect any increase in systemic risks that could arise from the rapid expansion of credit provided by them.

Speaking at an NBFC summit organised by the Confederation of Indian Industry, Gandhi said there are 202 NBFCs, classified as Non-Deposit taking Systemically Important NBFCs (NBFC-ND-SI), with a total asset size of ₹14 lakh crore.

Loans and advances extended by NBFC-ND-SIs posted a strong double-digit growth of 15.5 per cent during 2014-15, in contrast to the slowdown in commercial banks’ non-food credit during the same period, he added.

Gandhi noted that “NBFCs are more prone to systemic risk on account of concentration arising from exposure to a specific sector. Also, since these entities are more dependent on bank funding, both directly and indirectly, the interconnectedness risk tends to be high. Their asset-liability mismatches accentuate liquidity risks. All said, these risks can quickly escalate as solvency risk and lead to systemic risk as well.”

While the total number of NBFCs has come down from 51,929 in 1997 to 11,769 as on September 30, 2015, their asset size has grown from ₹75,913 crore as at the end of 1998 to ₹16 lakh crore as at September-end 2015.

The share of NBFC assets as a percentage of scheduled commercial banks’ assets has increased from 7 per cent in 1998 to 14.8 per cent as of March 2014.

“In terms of products and services offered, NBFCs complement the banks. Nevertheless, the business model of NBFCs is inherently risk-prone.

“Weaker underwriting standards, enhanced risk-taking capabilities, and increasing complexity of their activities, all cause concerns. Besides, NBFCs are exposed to key risks emanating from regulatory gaps, arbitrage, and contagion effect,” said the Deputy Governor.

Gandhi emphasised that the objective of NBFC regulations during the 20{+t}{+h} century was predominantly to protect the interests of depositors.

“However, as the NBFCs grew in size, their interconnectedness with the banking system became visible. And that raised concern about their capacity to disturb systemic stability. The NBFCs were brought under prudential regulatory framework from 2006 onwards,” he said. At present, there are several NBFC categories — asset financing, core investment, loan, microfinance, factoring, infrastructure financing, mortgage guarantee, and asset reconstruction, among others — and regulations vary across these NBFCs.

The Nachiket Mor committee on comprehensive financial services for small businesses and low-income households had recommended merger of various categories of NBFCs into two broad categories – NBFCs and core investment companies – and moving towards activity-based regulation.

Gandhi said the regulatory framework put in place in November 2014, was the first step in this direction.

Going forward, the central bank will work towards greater harmonisation of the regulations, with a view to reduce the number of categories.

However, the RBI is alive to the developmental needs of the economy and will continue to approve of new types of NBFCs, if the economy so requires, he added.

One such category is the NBFC-aggregator. The Deputy Governor said NBFC-aggregators will provide technology-enabled solutions to people so that they can view the position of their financial assets across institutions, and under different sectoral regulators, at one place.

The RBI is actively studying the peer-to-peer lending arrangements that are gaining traction.

While recognising the need for innovative products and services, Gandhi observed that, “We should be conscious of the risk that may emanate out of such innovations. Based on a detailed study, we intend to bring out a discussion paper for public consultation.” Further, there are demands that the regulations relating to core investment companies need revision.