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Tightening the leash

Monday, November 11, 2019

The Hindu Business Line

Excessive NBFC regulations will stifle innovation

After the IL&FS debacle, NBFCs have come under the microscope of regulators, investors, analysts and the wider public. Predictably, there are calls for further tightening of regulations in the belief that it will somehow improve matters.

To get to the crux of the issue, let’s begin by asking, why do NBFCs exist? After all, it should theoretically be possible for banks to take over this space. But then, the banking system’s coverage has well-known gaps that exclude large sections, precisely the failing that has allowed non-banks to thrive.

A case in point is loans against second-hand trucks, by logic a troublesome asset to finance. It depreciates rapidly and you cannot pinpoint the location of the asset for sure. A regulator evaluating this business would see red flags everywhere. And yet, Shriram Transport Finance plunged headlong and triumphed by learning the nitty-gritty of the trade and building an entire eco-system around it.

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