BS BFSI Insight Summit: NBFCs ready to harness growth, says Vishwanathan

Says RBI deserves part of the credit because of strong regulatory framework

Non-banking financial companies (NBFC) are ready to harness the country’s growth potential as it shrugs off the effects of the pandemic and part of the credit should go to the regulator, said N S Vishwanathan, former deputy governor, Reserve Bank of India (RBI).
 
“A strong regulatory framework, the successful resolution of a large housing finance company (HFC), a host of measures to ensure adequate flow of funds to the sector, strengthening the co-lending model, and this combined with the ability of the NBFCs to be nimble and flexible mean that the sector has a lot going for it in the ecosystem”, Vishwanathan said, while delivering the keynote address at the Business Standard BFSI Insight Summit.
 
Batting for convergence of the regulatory framework of NBFCs with that of banks, he said though strong regulations are often perceived as anti-market and anti-growth, they actually give entities a sustainable growth environment.
 
NBFCs enjoyed light-touch regulations because they catered to customers that were not served by big banks. But recent events forced the RBI to strengthen the regulatory framework for finance companies. After the IL&FS crisis, liquidity became scarce in the sector, causing asset-liability mismatches, resulting in a handful of NBFCs going bust and shaking confidence in the sector. This was accentuated by the pandemic, at least initially.
 
“While there is a move towards greater convergence in the regulatory framework, there are still areas where NBFCs have greater flexibility,” Vishwanathan said.
 

“Recent guidelines recognised one of the basic permutations for the regulation and supervision of NBFCs —systemic risk. Consequently, the regulations get closer and closer to the banks as the size of the NBFCs grow,” he said.
 
Last week, the RBI proposed a scale-based approach for NBFCs to ensure tight oversight. Recently, RBI Deputy Governor M Rajeshwar Rao had said that while some arbitrage that finance firms enjoy may be lost, the scale-based approach would not hamper the operational flexibility.
 
Vishwanathan said a well-regulated and supervised framework avoids market failures. A framework that is implemented consistently and transparently is more often than not a bulwark for a strong and sustainable market. “Every financial crisis has shown that the cost of putting in place fire-fighting equipment is much lesser than the cost of fighting a fire,” he added.
 
According to a recent report by the RBI, the credit intensity of NBFCs, i.e., NBFCs’ credit to GDP, grew consistently from 8.6 per cent in 2013 to 12.3 per cent in 2019 before moderating to 11.6 per cent in 2020 because of Covid. NBFC credit grew by an unsustainably 32.6 per cent in 2018 and moderated to 17.8 per cent in 2019 and further to 1.9 per cent in 2020 because the customers NBFCs cater to were more vulnerable and may have felt the pandemic’s impact more.