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Chamber Welcomes the Regulatory Framework on NBFCs Proposed by RBI

In Business
February 20, 2021

Cochin Chamber of Commerce and Industry, submitted its outlook on the discussion paper on revised regulatory frame work for NBFCs initiated by RBI.

With the growth in size and interconnectedness with other financial market participants, RBI observes that NBFCs have increasingly become systemically significant. Chamber observed that there are more than 10000 NBFCs in the country with an asset value of more than 30 lac crores and failure of any systemically significant NBFC can send shock waves across the entire financial sector and possibly disrupt the operations of other NBFCs regardless of their size. The proposed regulatory framework is aimed to align the regulatory interventions to preserve financial stability and limit the systemic risks. Some of the major NBFCs include Power Finance Corporation, Shriram Transport, Bajaj Finance, Mahindra and Mahindra Finance , Muthoot Finance etc.

The President of the Chamber K Harikumar welcomed this discussion as huge public money is being handled by these NBFCs and a proper regulatory frame work will keep the money of the public safe.

The proposed framework provides for the regulation on scale-based approach. This essentially means that regulatory and supervisory resources are to be more focused on the entities which have become systemically significant which would be regulated and supervised more closely.

The proposed scale – based regulation is founded on the ‘principle of proportionality’. The three basic factors that should trigger the “principle “are the risk perception, size of operations and nature of activity.

The proposed regulatory frame work groups all NBFCs in a pyramidal classification. The classification of layers from Base Layer (BL), Middle Layer (ML), Upper Layer (UL) and top layer is made commensurate to the regulatory intervention required.

Base Layer would include NBFCs with an asset size up to INR 1000 Cr. and those whose activities are unlikely to pose any systemic risk. They will have least stringent regulations. Middle Layer would include all NBFCs presently classified as systemically important (but with asset size of INR 1000 and above) and others engaged in activities which are likely to pose systemic risks; viz: Deposit taking NBFCs, Housing Finance Companies etc. The NBFCs in this category will see least disruption in terms of regulatory changes. There will be tighter governance stipulations.

Upper Layer will be top 25-30 NBFCs identified through supervisory discretion. This layer will have entities with systemic significance and pose extreme risk. RBI proposes to tighten the regulations in this category. The regulations will be Bank like. Additional governance regulations are also proposed.

Top Layer is supposed to remain empty. If RBI feels that there has been unsustainable increase in the systemic risk spill-overs from specific NBFC in the Upper layer, such NBFCs will be populated to Top layer. For those in the Top Layer, there will be tighter regulatory stipulations and more intensive supervisory engagement.

On the proposal to have differentiated regulatory framework based on the perceived systemic risk susceptibility of the NBFCs, the Chamber made the following suggestions.

1.Harmonization of NPA norm to 90 days from 180 days for base layer entities may be done in phases over a period of 1-2 years except for the 76 now systemically important NBFCs who are following 90 days norms now.

  1. 76 NBFCs which are now systemically important (asset size > 500 Cr, < 1000 Cr) will go to the proposed Base Layer. Some of these NBFCs are now following tighter regulatory norms and are subject to closer monitoring. The Chamber feels that any of the now systemically important company undergoing RBI’s corrective action should not be lowered to the Base Layer until they come out of the corrective action. Till then they should continue in a separate category.

3.For the Upper Layer of NBFCs, bank like regulatory norms are proposed. The monetary ceiling for recovery action under SARFAESI Act 2002 should be lowered for them and made on par with the Banks.

4.Though the NBFCs in Base Layer will not cause systemic risk individually; but as a group the impact can be significant. Therefore the Chamber suggests that though they will be positioned in a group where regulations are not tight, the monitoring and oversight by the RBI should be more focused and closer to ensure protection of public interest.