There is need to review the regulatory supervision of the non-banking financial sector in the backdrop of the recent meltdown of a few finance companies (read: chit funds) in the country, said Reserve Bank of India Governor D. Subbarao.

India’s non-bank financial sector is very large, diverse and complex. Some of it is in the corporate sector, but much of it is unincorporated.

The Governor observed that the different segments are controlled by different regulators. While some of the deposits raised by these companies are legal, some are illegal.

There is need to review the regulatory oversight of this (non-bank financial) sector keeping in view the mandatory and relative comparative advantages of the financial sector regulators, Subbarao said.

“While tightening regulation is important, it is not sufficient. What is to be noted is that much of the fraud in the non-bank sector happens through unlawful and fraudulent schemes, which should not be operating.

“This reinforces the importance of surveillance and enforcement, especially by the State governments,” said Subbarao at a banking and finance conference organised by the Indian Merchants’ Chamber.

Consumer protection

The Governor observed that focus on consumer protection is important because thousands of low-income households are lured into fraudulent financial schemes by the promise of high rates of interest.

In the Reserve Bank’s view, deposit taking should eventually be restricted only to banks which are tightly regulated.

Deposit collection by non-banking companies should be gradually minimised, and eventually eliminated. Towards this endeavour, the Reserve Bank has been quite restrictive in authorising non-banking finance companies (NBFCs) to collect deposits.

The number of NBFCs allowed to collect deposits has come down from 1,420 in 1998 to less than a fifth, 257, by 2013. Also, deposit-taking NBFCs comprise only about 2 per cent of the total number of NBFCs registered with the Reserve Bank.

ramkumar.k@thehindu.co.in

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