The Reserve Bank of India has revised regulatory framework for NBFCs, tightening norms on capital and bad loan recognition. It also caps NBFCs lending for IPO financing at Rs 1 crore per borrower. The framework categorizes NBFCs according to their activity with the rules getting more stringent with scale. The central bank will hike the net owned fund requirement for all NBFCs to Rs 10 crore.
M Rajeshwar Rao, RBI deputy governor, said that the failure of any large NBFC or housing finance company (HFC) may translate into a risk to its lenders with the potential to create contagion. “Also, the failure of any large and deeply interconnected NBFC can disrupt the operations of the small- and mid-sized NBFCs through a domino effect by limiting their ability to raise funds,” he said. “The liquidity stress in the sector triggered by the failure of a core investment company (IL&FS) broke the myth that NBFCs do not pose any systemic risk to the financial system.”
Rao said NBFCs would be categorized into three categories, mainly the base layer, top layer and middle layer. The base layer will include non-deposit-taking NBFCs with assets below Rs 1,000 crore. These could include peer-to-peer lending platforms, account aggregators, non-operating financial holding companies and other finance companies that do not avail public funds, and do not have any customer interface. The middle layer would include deposit-taking NBFCs with assets over Rs 1,000 crore and would include primary dealers, infrastructure debt funds, core investment companies, HFCs and infrastructure finance companies. The upper layer will be specifically identified by the RBI as warranting enhanced regulatory requirements and would include the top 10 NBFCs in the country.
The deputy governor warned about the malpractices of digital lenders. “While the benefits accruing from digital financial services is not a point of debate, the business conduct issues and governance standards adopted by such digital lenders have shaken the trust reposed in digital means of finance in India,” he said. “We were and are inundated with the complaints of harsh recovery practices, breach of data privacy, increasing fraudulent transactions, cybercrime, excessive interest rates and harassment.”