RBI Tightening Rules for NBFCs

The banking sector is likely to face more stringent regulation in general, and with reference to the Non-Banking Financial Companies (NBFCs) in particular, following a long series of defaults and management oversights that have been coming to the fore in recent months. Most recently, Infrastructure Financing and Leasing Services Ltd. defaulted on debt valued at Rs. 395 crores, and while it may be a far smaller amount than some of the non-performing assets that have made the headlines, the concern stems from the fact that the number of players in the small-value loans market is rather large, and mostly operating on lax enforcement of existing regulations.

There is an expectation that regulators may cancel the licenses of close to 1,500 smaller NBFCs and make it more difficult than it currently is for new applications to be approved. Popularly referred to as the “shadow banking sector”, this sector has about 11,400 firms that operate within it, and their combined worth is estimated at Rs. 22.1 trillion. The lack of stringent regulation in an industry that has been growing at almost double the pace of most banks, while also able to receive top credit ratings more easily is a matter that the RBI and regulators are now more concerned about.

According to the Chairman of the Finance Industry Development Council, Raman Aggarwal, “RBI has issued show-cause notices, given them time and is now in the process of canceling their registration. Ultimately up to 1,500 should go out.”