RBI likely to propose stricter regulations for shadow banks: Report

RBI looks to strengthen solvency and sustainability of a sector that has been showing signs of stress in recent years

The Reserve Bank of India is likely to propose stricter regulatory norms for shadow banks in a bid to strengthen solvency and sustainability of a sector that has been showing signs of stress in recent years, two sources said.

RBI began trying to move towards tighter norms for the sector after Infrastructure Leasing & Financial Services, the largest NBFC, went bankrupt in 2018, and Dewan Housing Finance Corp and Altico Capital defaulted on payments in 2019.

The RBI is expected to set out its proposals in a discussion paper next week and recommend that bigger non-banking finance companies (NBFCs), or shadow banks, maintain a statutory liquidity ratio (SLR), the sources said.

Neither officials wished to be named as the discussions on the proposals have not been made public.

Currently, banks are mandated to maintain SLR or the minimum percentage of deposits that they must hold in the form of liquid cash, gold or government securities at 18%.

The RBI could also suggest large NBFCs be required maintain a cash reserve ratio. CRR currently stands at 3%, below the usual 4% level, after a temporary reduction by RBI due to the ongoing pandemic that will be reversed after March 31.

"As a security, to ensure sustainability and also to ensure liquidity for NBFCs, SLR and other steps, like CRR are being contemplated," one of the officials said.

The move could be a huge cash drain for the sector which is currently free from maintaining these reserve ratios, which allows them to give loans to sub prime lenders as well.

The proposal, however, is expected to recommend a phased implementation of the reserve ratios, ensuring NBFCs are given time to adhere to the norms, the official said.

"Cost of compliance to rules and regulations should be perceived as an investment as any inadequacy in this regard will prove to be detrimental," RBI Governor Shaktikanta Das said in a speech on Saturday referring to increased regulation in recent years for banks and shadow banks.