Harmonisation of NBFCs to ease regulatory complications, say experts

In its endeavor to replace entity-based regulations with activity-based regulations, the Reserve Bank of India decided to harmonise major categories of non-banking financial companies (NBFCs) engaged in credit intermediation into a single category.

Experts are of the opinion that this move will provide operational ease for both the regulator and the NBFCs but will not have any larger impact on the sector.

“It may get easier for the central bank to operationally monitor these NBFCs after the harmonisation,” said Karthik Srinivasan of ICRA. But he said the move  is directly not going to affect the liquidity easing for NBFCs.

The RBI, on Thursday, said asset finance companies (AFCs), infrastructure finance companies and infrastructure debt companies will be clubbed into a single category and this will encompass almost 99 per cent of the NBFCs by number. 

At present, there are 12 categories of NBFCs.

“Harmonisation will enable NBFCs to lend/ invest across the categories as they deem fit which will bring more competition and enable product innovations,” said V P Nandakumar, managing director and chief executive of Mannappuram Finance. 

“For example, AFCs would have hesitated to lend to other sectors fearing loss of their AFC status. With harmonisation, we expect all NBFCs to be able to lend across segments based on the opportunities,” Nandakumar said.

Raman Aggarwal, chairman of Finance Industry Development Council, said, “The RBI has been mooting this concept for some time now. What they have done as of now is that they have brought lending companies under one umbrella. This will not have much of an impact. The risk weight benefit was already available to the AFCs and now they have brought all on par, except the core investment companies.”

As the IL&FS group defaulted on its debt obligations, the NBFC sector earned a bad reputation for itself and also went through a period of liquidity tightening. Although not every NBFC had an asset liability management problem, yet raising funds became costlier for the sector as a whole and some avenues of funding also dried up. 

Commenting on this, Aggarwal said, “What we have been asking for is, there is an important need to create a distinction between the housing finance companies and the NBFCs. There you cannot club. When any crisis takes place, like the IL&FS situation, unfortunately, what happens is any finance company which is into lending and is not a bank is clubbed under NBFC. So, it is important to create that distinction and we have had a meeting with RBI about this."