In his first public speech since he took over as the Reserve Bank of India (RBI) deputy governor, M Rajeshwar Rao stressed a graded approach for regulation of non-bank lenders, moving away from the ‘one-size-fits-all’ approach.
"The uniqueness of this sector lies in the inherent diversity of activities carried out by different NBFCs and thus, there can be no ‘one-size-fits-all’ prescription in the regulatory approach for NBFCs. Perhaps a calibrated and graded regulatory framework, proportionate to the systemic significance of entities concerned is the way forward," Rao said in his address at the National E-Summit on Non-Banking Finance Companies organised by ASSOCHAM.
NBFCs with significant externalities and which contribute substantially to systemic risks must be identified and subjected to a higher degree of regulation, he said. "One can also argue that the design of a prudential regulatory framework for such NBFCs can be comparable with banks so that beyond a point of criticality to systemic risks, such NBFC should have incentives either to convert into a commercial bank or scale down their network externalities within the financial system," he added.
Stressing on the need to rethink regulation for NBFCs, Rao said the entities are neither critical in terms of systemic risk nor too small in their scale and complexity, currently enjoy a great degree of regulatory arbitrage vis-à-vis banks. "As a group, these entities can contribute to the build-up of systemic risks because of the regulatory arbitrage enjoyed by them; hence there is a need to recalibrate the regulations," he said.
These comments from the deputy governor come amid NBFCs growing in size and scale, with some of the largest one becoming too-big-to-fail due to their inter-connectedness with the financial system.
RBI data showed that between March 31, 2009, and March 31, 2019, the total assets of NBFCs grew at a compounded annual growth rate (CAGR) of 18.6 percent, while the balance sheets of scheduled commercial banks (SCBs) grew at a CAGR of 10.7 percent. The aggregate balance sheet size of NBFCs also increased from 9.3 percent to 18.6 percent of the aggregate balance sheet size of SCBs during the corresponding period. In absolute terms, the asset size of the NBFC sector (including HFCs), as of March 31, 2020, now stands at Rs.51.47 lakh crore, as per data presented by Rao.
"It is not enough to understand and confront the vulnerabilities of the banking sector alone. The need of the hour is to understand vulnerabilities in the NBFC sector and how shocks are transmitted to or from the sector," Rajeshwar Rao said.
(Edited by : Jomy)