Large NBFCs should convert into banks or shrink biz: RBI deputy guv Rao

Also proposes to eliminate regulatory arbitrage enjoyed by certain NBFCs that are slowly building up systemic risk

Reserve Bank of India’s newly-appointed Deputy Governor M Rajeshwar Rao on Friday said larger non-banking financial companies (NBFCs) should be regulated as strictly as banks to preserve financial stability. He advocated a more “calibrated and graded regulatory framework, proportionate to the systemic significance of entities concerned” as the way forward.  

“One can also argue that the design of a prudential regulatory framework for such NBFCs can be comparable with banks so that beyond a point of criticality to systemic risks, such institutions should have incentives either to convert into a commercial bank or scale down their network externalities within the financial system," Rao said at a summit organised by Assocham. This arrangement, the deputy governor said, would make the financial sector “sound and resilient while allowing a majority of NBFCs to continue under the regulation-light structure".

Rao also proposed to eliminate regulatory arbitrage enjoyed by certain NBFCs. These NBFCs are neither critical in terms of systemic risks, nor are they too small in their scale and complexity. “These NBFCs currently enjoy a great degree of regulatory arbitrage vis-à-vis banks. As a group, they can contribute to the build-up of systemic risks because of the regulatory arbitrage enjoyed by them; hence there is a need to recalibrate the regulations," he said.

Rao wanted to bring stricter regulations in the microfinance sector. While several large MFIs have converted into small finance banks, the share of NBFC-MFIs in the overall microfinance sector has come down to a little over 30 per cent, he said.

“Today, we are in a situation where the regulatory rigour applies only to a small part of the microfinance sector. There is a need to re-prioritise the regulatory tools so that our regulations are activity-based rather than entity-based. After all, the core of microfinance regulation lies in customer/consumer protection,” Rao said.

The dynamic nature of the fintech sector continues to pose regulatory challenges. “While making regulation for the future in the fintech area, orderly growth, customer protection, and data security will remain the guiding principles for the RBI,” Rao said.  

The deputy governor noted that the sector had become “extremely diverse” and that the business model, customer profile, and the nature of financial products varied substantially depending on the category of the NBFC.  

“The uniqueness of this sector lies in the inherent diversity of activities carried out by different NBFCs and, thus, there can be no one-size-fits-all prescription in the regulatory approach for NBFCs,” Rao said.