On Monday, Finance Minister Nirmala Sitharaman said the government is actively considering a proposal from the Reserve Bank of India (RBI) seeking more powers to improve its regulatory and supervisory mechanism for Non-Banking Financial Companies (NBFCs). Why is this being proposed? Recent defaults and delays in loan repayments by a section of NBFCs have shaken the confidence in the financial markets, leading to fears that potential solvency risks at certain companies can be contagious. Liquidity for NBFCs with default ratings has completely dried up, creating broader challenges for policymakers. In this backdrop, the government's plan to consider a proposal from the RBI seeking more powers to improve its regulatory and supervisory mechanism for NBFCs is significant. What changes are being sought by RBI? The RBI has conventionally adopted light-touch regulatory approach towards NBFCs to enable them reach masses through innovative financial products and service delivery mechanisms. “In the light of recent developments, there is a case for having a fresh look at their regulation and supervision. It is our endeavour to have an optimal level of regulation and supervision so that the NBFC sector is financially resilient and robust,” RBI Governor Shaktikanta Das said in a lecture in Pune on June 8. More powers will enable RBI to close regulatory gaps between banks (which are tightly regulated) and NBFCs. The RBI has already reduced the periodicity of the NBFC supervision to 12 months from 18 months earlier. What is the scale of the challenge? NBFCs were the largest net borrowers of funds from the financial system with gross payables of around Rs 8.44 lakh crore and gross receivables of around Rs 7.23 lakh crore as on end-March 2019. These companies depend largely on public funds such as bank borrowings, debentures and commercial papers, which account for 70 per cent of the total liabilities of the sector. When banks and mutual funds stop fresh loans to NBFCs facing default possibility, it can potentially lead to contagion in the financial markets. The consolidated balance sheet size of the NBFC sector grew by 20.6 per cent to Rs 28.8 lakh crore during 2018-19 as against an increase of 17.9 per cent to Rs 24.5 lakh crore during 2017-18.
