Large NBFCs can become banks - RBI
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The Reserve Bank of India (RBI) has said that there is a case for systemically important non-banking finance companies (NBFCs) beyond a certain size to convert into banks and subject them to the same prudent regulatory framework. This arrangement will enable a regulation-light structure to continue for most NBFCs that gives them the flexibility to serve the last-mile consumers.
“The spill-over of risks from a systematically important NBFC capable of transmitting perceptible impact on financial stability must be dealt with in a proportionate manner. So, NBFCs with significant externalities and which contribute substantially to systemic risks must be identified and subjected to a higher degree of regulation,” said RBI deputy governor M Rajeshwar Rao, speaking at a summit on NBFCs organised by Assocham.
According to the RBI, risks from NBFCs can be passed on to the banking system. As of end-March 2020, NBFCs have been the largest net borrowers of funds from the financial system, of which more than half were from scheduled commercial banks, followed by mutual funds and insurance companies.
Pointing out that very large finance companies need the same regulation as banks, Rao said, “One can also argue that the design of a prudential regulatory framework for such NBFCs can be comparable with banks so that beyond a point of criticality to systemic risks, such NBFCs should have incentives either to convert into a commercial bank or scale down their network externalities within the financial system.”
The RBI has increased its vigilance over the NBFC segment following high growth in the last decade, which was followed by a collapse of two large finance companies IL&FS and DHFL. Between March 31, 2009, and March 31, 2019, the total assets of NBFCs grew at a compounded annual growth rate (CAGR) of 18.6% — almost twice as fast as banks, which grew with a CAGR of 10.7%.
With this growth, the balance sheet size of the NBFC sector increased from 9.3% to 18.6% of the aggregate balance sheet size of commercial banks. In absolute terms, the asset size of the NBFC sector (including housing finance companies), as on March 31, 2020, is Rs 51 lakh crore.
“The spill-over of risks from a systematically important NBFC capable of transmitting perceptible impact on financial stability must be dealt with in a proportionate manner. So, NBFCs with significant externalities and which contribute substantially to systemic risks must be identified and subjected to a higher degree of regulation,” said RBI deputy governor M Rajeshwar Rao, speaking at a summit on NBFCs organised by Assocham.
According to the RBI, risks from NBFCs can be passed on to the banking system. As of end-March 2020, NBFCs have been the largest net borrowers of funds from the financial system, of which more than half were from scheduled commercial banks, followed by mutual funds and insurance companies.
Pointing out that very large finance companies need the same regulation as banks, Rao said, “One can also argue that the design of a prudential regulatory framework for such NBFCs can be comparable with banks so that beyond a point of criticality to systemic risks, such NBFCs should have incentives either to convert into a commercial bank or scale down their network externalities within the financial system.”
The RBI has increased its vigilance over the NBFC segment following high growth in the last decade, which was followed by a collapse of two large finance companies IL&FS and DHFL. Between March 31, 2009, and March 31, 2019, the total assets of NBFCs grew at a compounded annual growth rate (CAGR) of 18.6% — almost twice as fast as banks, which grew with a CAGR of 10.7%.
With this growth, the balance sheet size of the NBFC sector increased from 9.3% to 18.6% of the aggregate balance sheet size of commercial banks. In absolute terms, the asset size of the NBFC sector (including housing finance companies), as on March 31, 2020, is Rs 51 lakh crore.
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