FSDC panel discusses regulatory gaps in NBFC sector

A Financial Stability Development Council's (FSDC) sub committee, in its meeting today, discussed the regulatory gaps in the non-banking financial sector and ways to plug them. The meeting, which was chaired by the governor of the Reserve Bank of India, was the second meeting the sub-committee.

“The sub-committee reviewed recent macroeconomic and financial sector developments and focused on issues related to systemic risks. It also deliberated upon regulatory gaps in the non-banking finance companies (NBFC) sector and the regulation of government-sponsored NBFCs,” RBI said in a release. Regulations for NBFCs are not as stringent as those for banks, since they are not subject to any restriction on capital market exposure unlike banks. There are also no restrictions on NBFCs for setting up subsidiaries.

RBI had earlier said multiple regulators for non-banking financial companies and an entity-based approach to regulation led to possible regulatory gaps. “Functional activities remain unregulated, gaps in regulation permit surrogate raising of public funds, leveraged activities by merchant banks, portfolio managers and brokerages are not subject to prudential regulation. These need to be urgently addressed,” RBI had said in its second financial stability report released in December 2010. The sub-committee agreed to strengthen the regulatory framework for wealth management activities to formalise a mechanism to supervise financial conglomerates, RBI said.

Apart from the RBI governor and four deputy governors, the meeting was attended by R Gopalan, economic affairs secretary, and Kaushik Basu, chief economic advisor. Regulators of financial markets, insurance and pension sectors were also present. Officials who attended the meeting said attracting foreign investment in infrastructure debt funds was also discussed. “This (discussion on infrastructure debt funds) is to invite foreign funding and what structure would satisfy foreign investors,” said Yogesh Agrawal, chairman, Provident Fund Regulatory and Development Authority. When asked whether the provident fund regulator would allow funds to invest in infrastructure debt funds, Agrawal said the guidelines were already liberal.