NBFCs face new governance, exposure code: From licensing to CEO package

RBI wants to snuff out evergreening, stock-play via bank-led units; risk-based supervision on cards

The Reserve Bank of India (RBI) is drawing up a new code for non-banking financial companies (NBFCs) which envisages curbs on the licensing and businesses of bank-led units, parity in CEO remuneration package with that of private banks, and a gradual shift to the risk-based supervision (RBS) system.

A raft of measures will be rolled out once RBI Governor Shaktikanta Das is through with the departmental presentations, which are in their final lap. Multiple high-level financial sources said these guidelines would dovetail into, and form a sub-set of, the larger regulatory framework for banks and their subsidiaries. This will see the birth of the holding company model, once tax and stamp duty issues are ironed out by North Block because of revenue implications.

Mint Road’s extant guidelines on bank-led NBFCs are largely “discretionary” and there is no well-articulated policy, pointed out a source, even though no new licence applications have been entertained by the regulator in the last four years. The banking regulator also wants to plug the loopholes that allow evergreening of loans through banks’ NBFC arms in the garb of “innovative financing structures”. The NBFCs under the umbrella of banks said to be under close scrutiny are those which put their books into play as loan vendors and with high exposure to the sensitive sectors. 

Capital markets, real estate and commodities are defined as sensitive sectors in view of the risks associated with fluctuations in prices of such assets. While banks’ direct exposure was largely flat, the RBI in its Report on Trend and Progress of Banking (2017-18) observed that NBFCs had been growing robustly in spite of the adverse macro-financial environment, with a consolidated balance sheet expansion of over 17 per cent in the first half of FY19. NBFCs’ exposure to real estate increased during FY17, reflecting search for higher yields to 13.4 per cent from 13.3 per cent in the preceding fiscal year. 

Fear is that bank-led NBFCs may also have taken on substantial exposure given that several state-run banks had almost vacated lending to these sectors given the strictures under the prompt correct action in recent times.

Of particular concern is the business of loans against shares to promoters of companies, which allow them to play footloose, and the dangers arising out of such exposures to the capital and realty marts. To the extent banks use their NBFCs to gain regulatory flexibility to service their borrowers, the fear is that if these subsidiaries were to walk into a quicksand, capital calls will come to bear on the promoter bank.

The move to write in a new framework on NBFCs’ CEO remuneration is to align it with that of private bank chiefs on bonus and stock options and to make it part of the variable-pay component. So too, the shift to get NBFC’s on RBS -- the off-site surveillance mechanism in place for banks. The guidelines may not cover the entire universe of NBFCs but to begin with at least the systematically important entities on liquidity, exposures, supervisory controls and governance like in the case of banks.

Ringing in a new order
 

| New policy will specifically target bank-led NBFCs

| It will help arrest evergreening of loans through banks’ NBFC arms via innovative financing structures 

| Exposure to sensitive sectors, particularly loans against pledge of promoter shares, to be curbed

| NBFC CEOs' pay structure to mirror that of private bank chiefs in terms of bonus and stock options

| Plan to move over to risk-based supervision like banks