Harmonising NBFCs

Monday, February 25, 2019
The Hindu Businessline

Needed, a new risk-weight mechanism
The RBI recently spoke about working towards harmonisation of the various categories of NBFCs involved in credit intermediation.
This is a welcome step. Of the more than 10,000 NBFCs operating in India, 95 per cent are non-deposit taking. The others include asset financing, micro-finance, and core investment companies.
Too many categories only increase compliance cost for the industry and monitoring cost for the regulator. When the RBI releases the guidelines for harmonised entities later this month, it will recognise only two categories, NBFCs and CICs. The effects of the harmonised regulations could have far-reaching implications for the future growth and business direction of NBFCs.
The key questions that the RBI should address are: Should we have the same set of regulations for all NBFCs even as they vary widely in their business focus and sources of funding? How do you enforce prudential risk measures for each asset class, while preventing distortionary anomalies from arising post implementation of ‘activity based’ regulations? And, should banks and NBFCs engaged in similar activities operate under equitable, non-discriminatory regulations?
Separate regulations for each activity that an entity is involved in would increase compliance cost, which will hit smaller players more. On activity-based regulations, there is a need to differentiate between assets based on inherent risks. Risk weights could then be prescribed based on the quality of asset and tenure.
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