RBI for fewer categories of NBFCs for effective regulation

The Reserve Bank is working towards harmonising regulations for non-banking financial companies to reduce the number of categories in the sector, its Deputy Governor R Gandhi said today.
"Going forward, we will work towards greater harmonisation of the regulations to bring down the number of categories within the NBFC sector," Gandhi said at an event organised here by industry body CII.
He said however that the central bank is aligned to the developmental needs of the economy and therefore will continue to approve of new kinds of NBFCs if the economy requires them.
RBI is actively studying the peer-to-peer lending arrangements that are slowly gaining traction, he added.

"We are studying peer-to-peer lending and we will come out with the discussion paper. Already Sebi has come out with the similar kind of paper," Gandhi said.
The central bank is looking at another category of NBFCs -- NBFC account aggregators for which the announcement was made this July, he said.

NBFC account aggregators will provide technology-enabled solutions to a person to view at one place the position of financial assets across institutions under different regulators, he said, adding that "guidelines for the same are under preparation".
He also said RBI, based on demand, is looking at revisiting the norms relating to core investment companies.

Noting that business model of NBFCs is inherently risk-prone, Gandhi blamed "weaker underwriting standards, enhanced risk-taking capabilities and increased complexities of their activities" as the reasons for this.
Besides these risks, he said, NBFCs are also exposed to key risks emanating from regulatory gaps, arbitrage and contagion effects.
They are also more prone to systemic risks due to concentration of exposure to specific sectors. Such risks, also due to asset liability mismatches, can quickly escalate into solvency risks and can lead to systemic risks.
Total number of NBFCs came down from 51,929 in 1997 to 11,769 in September 2015, while their asset size grew from Rs 75,913 crore in December 1998 to Rs 16 trillion (Rs 16 lakh crore) in September 2015.

Noting that NBFCs-MFIs are going to shrink heavily as the
big 10 of them will be converting themselves into small finance banks, Gandhi said this can bring in higher impetus for other NBFC-MFIs to grow.
Infra NBFCs will have greater scope going forward as faster economic growth will bring in new projects and banks having learnt certain lessons in the past will be cagey to fund such projects.
On tightening of SDR norms, he said: "Based on the feedbacks we have got from the market, we will be re-looking at these norms.