NBFC stocks in focus; Chola Investment, Shriram Transport rally up to 8%

In a discussion paper released on its website, the RBI has suggested a four-tier pyramid structure for the sector.

Shares of non-banking financial companies (NBFCs) were in focus in Monday's session as they rallied up to 8 per cent after the Reserve Bank of India (RBI) released a discussion paper on revised regulations for the sector.

Shares of Shriram Transport Finance Corporation jumped 8 per cent to Rs 1,242 on the BSE while Cholamandalam Investment and Finance Company and Mahindra & Mahindra Financial Services were up 6 per cent each at Rs 449 and Rs 185, respectively, in intraday trade. Housing Development Finance Corporation (HDFC), Bajaj Finance, Bajaj Finserv and LIC Housing Finance, among large-cap stocks, were up in the range of 3 per cent to 5 per cent.

The RBI on Friday proposed to introduce a scale-based regulatory framework for NBFCs to segregate larger entities and expose them to a stricter set of “bank-like” rules. This is aimed at protecting financial stability while ensuring that smaller NBFCs continue to enjoy light-touch regulations and grow with ease.

In a discussion paper released on its website, the central bank suggested a four-tier pyramid structure for the sector. There will be a base layer (NBFC-BL), which will have NBFCs with an asset size of up to Rs 1,000 crore, accommodating more than 95 per cent of the non-deposit taking shadow lenders. This layer will continue to enjoy regulatory arbitrage. The discussion paper introduces a scale-based approach to regulation from a 'systemic significance' vantage point. NBFCs would be categorized across four different layers (Base, Middle, Upper, and Top) based on various parameters including size, interconnectedness with the system, etc. CLICK HERE TO READ FULL REPORT

The discussion paper by the RBI signals its intent to tighten regulation for NBFCs by reducing the regulatory arbitrage. At the same time, the RBI acknowledges the contribution of NBFCs in catering to the underserved segment. Hence, any change in regulation would be done keeping in mind the business model and requirements of the NBFCs.

"Discussion paper, contrary to earlier expectation, is not so disruptive. Identification of significant NBFCs and judicious utilization of regulatory framework remains the main aim of the discussion paper," ICICI Securities said in a note.

Taking a size-based approach to regulation rather than a 'one-size-fits-all' regulatory approach is the right thing to do, brokerage Motilal Oswal Financial Services said in a sector update. 

Smaller NBFCs typically operate in semi-urban and rural areas and serve customers who are underbanked - if such NBFCs were to be overburdened with tight regulations, it would defeat the overarching goal of financial inclusion, the brokerage said, adding that while we await details on the final guidelines, we believe the current suggestions would not have any meaningful impact on our Coverage Universe.