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Discussion paper on scale-based regulation for NBFCs soon: RBI governor

Updated : January 16, 2021 03:02 PM IST

Das said whether it is small banks and NBFCs or large banks and NBFCs, "the differentiating factor among them is the quality of governance."

"Integrity and quality of governance are key to good health and robustness of banks and NBFCs," Shaktikanta Das said.

The Reserve Bank of India (RBI) will soon issue a discussion paper on a scale-based regulation of non-banking finance companies (NBFCs), governor Shaktikanta Das said on Saturday.

While delivering the 39th Palkhivala Memorial Lecture this morning, RBI governor Shaktikanta Das said, "Our scale-based regulation for NBFCs as you know we announced in our last policy on December 4th… the discussion paper is almost ready. It will come out in next few days, perhaps in the next week."

The focus of these new regulatory guidelines would be to ensure that all NBFCs, irrespective of their size, have sufficient flexibility to grow. "The scale based regulatory guidelines we have… you know…the focus is to nurture the sector, to ensure NBFC sector – that is the big as well as the small entities- have sufficient flexibility to operate and grow. At the same time, the focus will be on prescribing certain prudential regulations."

Also read: RBI begins the long road to normalcy of monetary conditions

Das said whether it is small banks and NBFCs or large banks and NBFCs, "the differentiating factor among them is the quality of governance," and therefore, the emphasis would have to be on the quality of governance and the business models.

Earlier in December while announcing the monetary policy, the governor had hinted that a scale-based regulatory approach linked to the systemic risk contribution of NBFCs could be the way forward.

"This regulatory regime based on the principle of proportionality warrants a review. It is felt that a scale-based regulatory approach linked to the systemic risk contribution of NBFCs could be the way forward," Das had said in December.

Also read: VIEW: RBI, liquidity and inflation

Stressing on the need for financial stability especially in the current circumstances, the governor said, "Our principal objective during this pandemic period was to support economic activity; and looking back, it is evident that our policies have helped in easing the severity of the economic impact of the pandemic. I would like to unambiguously reiterate that the Reserve Bank remains steadfast to take any further measures, as may be necessary, while at the same time remaining fully committed to maintaining financial stability."

"Integrity and quality of governance are key to good health and robustness of banks and NBFCs," Shaktikanta Das said. "A good governance structure will have to be supported by effective risk management, compliance functions and assurance mechanisms. These constitute the first line of defence in matters relating to financial sector stability," he said.

The governor highlighted that going ahead, financial institutions in India would have to walk a tightrope in nurturing the economic recovery within the overarching objective of preserving long-term stability of the financial system.

Also read: RBI forms working group on digital lending amid growing concerns

"The current COVID-19 pandemic related shock will place greater pressure on the balance sheets of banks in terms of non-performing assets, leading to erosion of capital. Building buffers and raising capital by banks – both in the public and private sector – will be crucial not only to ensure credit flow but also to build resilience in the financial system," he added.

Das said the potential recapitalisation requirements for the banking system to meet regulatory norms as well as for supporting growth capital may be to the extent of 150 bps of Common Equity Tier-I capital ratio. While a few large public sector banks (PSBs) and major private sector banks (PVBs) have already raised capital, and some have plans to raise further resources taking advantage of benign financial conditions, Das said the process would have to be put on the fast track.

Published : January 16, 2021 01:24 PM IST

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