RBI action could increase business volatility for some NBFCs: Fitch

Firms' implementation of regulatory instructions varies, says ratings agency

A spate of regulatory actions on non-banking finance companies (NBFCs) could raise near-term business volatility for some entities, said ratings agency Fitch on Thursday.

Efforts by the Reserve Bank of India (RBI) to strengthen corporate governance and risk management may reduce industry risks, it said.

Regulations are not always interpreted consistently in the financial sector and firms’ implementation varies. The sector has evolved rapidly but the environment can make financial supervision more challenging and contribute to compliance and governance lapses, said Fitch in a statement.

ALSO READ: RBI urges gold loan NBFCs to strictly comply with norms amid biz surge

A series of enforcement actions on banks and NBFCs has raised regulatory event risk for the sector than in the past two years. In March, the RBI asked IIFL Finance Ltd to halt new gold-backed lending and associated off-balance sheet funding transactions. Cash disbursal of gold-backed loans exceeding Rs 20,000 was among a number of deficiencies regulators found in the company’s business. Fitch considers some of these deficiencies to be more severe.

The RBI recently said that NBFCs should comply with existing regulatory caps on disbursal of loans in cash to below Rs 20,000 (around $ 240) per outstanding facility. This compares to a higher Rs 200,000 cap on general cash transactions, which some lenders had adopted as a limit.

Many NBFCs have historically demonstrated high risk tolerance, including an appetite for rapid growth, elevated leverage and slim liquidity buffers, said Fitch. Such practice contributed to NBFC failures in 2018-2019. After that, many finance companies took steps to trim short-term funding, shore up capital and shed risky assets. Debt/equity for large Fitch-monitored NBFCs eased to 4.3x in Financial Year 2022 (FY22), from 5.9x in FY18. However, risk appetites have started to increase as the economic backdrop has become more benign, said Fitch.