Closer coordination among regulators key to NBFC stability: RBI DG

The RBI has implemented a scale-based regulatory framework for the NBFC sector, categorising them based on their scale of operations and potential interconnectedness

Even as the Reserve Bank of India (RBI) has harmonised regulations for non-banking financial companies (NBFCs) to prevent arbitrage, the growing diversity of entities in the sector and their increasing interconnectedness highlight the need for closer coordination among financial regulators to ensure financial stability, said M Rajeshwar Rao, deputy governor, RBI. He was speaking at the “High-Level Policy Conference of Central Banks in the Global South”.

 

For the NBFC sector, the RBI has put in place a scale-based regulatory framework, which categorises NBFCs as per their scale of operation and potential for interconnectedness. Under the scale-based regulations, NBFCs have been categorised into three layers: upper layer, middle layer, and base-level.

 

 

Last month, RBI governor Shaktikanta Das came down heavily on NBFCs and flagged the “growth at any cost” approach of some of them, and warned them that the central bank would not hesitate to take action if there is no self-correction. Following this, the RBI barred four NBFCs — Asirvad Microfinance, Arohan Financial Services (also an MFI), DMI Finance, and Navi Finserv — from sanctioning and disbursing loans to borrowers for charging exorbitant interest rates.

 

Rao highlighted three emerging risks pertinent to India and the global south: extreme climate events and climate change, emerging technologies, and resilience of the NBFC sector.

 

According to Rao, as a policymaker, it is still a challenge to quantify climate-related risks and their impact on the real economy, and the financial sector. Additionally, he said that the advent of new processes backed by block-chain and AI/ML, new products like tokenised assets, and new entities like bigtechs and fintechs has compelled policymakers to remain on their toes.

 

“We do not want to stifle such progressive practices, but we must provide suitable guardrails to ensure systemic stability. The quest to find balance between innovation and prudence is thus going to be a challenge”, Rao said.

 

Further, Rao also highlighted that the national aspiration to become a developed economy by 2047 requires a stronger foundation of financial institutions. “Besides banks, existing entities would require easier access to robust capital markets to fund their growing asset books, as access to deep financial markets would enable them to hedge associated risks on their balance sheets,” he said, adding that there would be entry of new players, products, and services (e.g. private credit) to meet the growing credit needs.

 

“Therefore, an enabling regulatory system would have to be put in place to meet these challenges and to safeguard financial stability without hindering the process of innovation,” Rao said.