NBFC norms will check regulatory arbitrage, support growth: Experts

The Reserve Bank’s plan to use scale-based approach to regulate and enhance minimum capital requirement of non-banking financial companies (NBFCs) will reduce arbitrage and support their sound growth, analysts have said.

NBFC executives and rating agency analysts said the financial sector regulator needs to provide a clear path for the transition of large, complex, well-regulated and well-governed NBFCs into banks.

An analyst with a rating agency said the regulation should be ownership neutral and avoid special treatment. He added that state-owned finance companies should be treated on a par with their private counterparts.

Government-owned NBFCs are still in the transition period wherein they have to attain the minimum capital to risk (weighted) assets ratio (CRAR) by March 31, 2022.  It has, therefore, been proposed by the RBI not to subject these NBFCs to the upper layer regulatory framework.

Domestic brokerage Motilal Oswal, in note to clients, said the regulator has made it clear to tighten regulation for finance companies by reducing the regulatory arbitrage and acknowledged their contribution in catering to the underserved segment. Any change in regulation would be done keeping in mind the business model and requirements of the NBFCs, according to the RBI.

L Viswanathan, partner, Cyril Amarchand Mangaldas, said the RBI has rightly emphasised the principle of proportionality in identifying the bases for scale-based regulation. 

The parameters based on which identification will be done are size, leverage, inter-connectedness, complexity and supervisory inputs. The classification criteria for the upper, middle and base layer require careful consideration. Better regulation will give greater confidence for attracting capital to financial intermediaries, said Visawanathan.

Emkay Global Financial Servi­ces said the proposed regulations would not cause near-term pain but provide with many long-term gains. It will improve regulation and keep their aim of continuing with financial inclusion and last-mile connectivity intact, it added.

The RBI does not intend to introduce statutory liquidity ratio (SLR) and cash reserve ratio (CRR) for NBFCs. This will quickly ease investor fears over NBFC growth and liquidity profile in near term, said Emkay.

Two top officials with major NBFCs said there is no big change for large NBFCs. Mainly, it is for the small ones, they added.