A Measured Regulatory Approach

Following the upheaval seen in NBFCs in the past few years, banking regulator RBI is keeping a Keen eye on the functioning of the larger entities

- KETAN DALAL, MANAGING DIRECTOR, KATALYST ADVISORS

NON-BANKING FINANCIAL companies NBFCs) are a major source of credit alongside banks. The tilt of India’s population towards youth—and their aspirations and desires—has made them access credit for a variety of requirements such as purchasing cars, white goods, housing, education, and the like.

From the standpoint of an NBFC, there are risks in terms of processes and lending due to which there have been several failures IL&FS is one example) in the past decade or so. The increasing size of NBFCs can also pose a significant challenge suchas a credit contagion in case of systemic failure or even stress in one or a few NBFGs. It has also been the feeling amongst regulators that NBFCs have greater operational flexibility compared to banks, and that creates what is commonly referred to as regulatory arbitrage” in favour of NBFCs.

It is in this context that a regulatory review was undertaken by the Reserve Bank of India RBI) on an ongoing basis on December 4, 2020. Following the review, the RBI’s press release had concretely mooted the idea of a scale-based regulatory framework” for NBFCs, given that a one-size-fitsall approach would not be practicable. Inthat context, pera circular on October 22, 2021, the RBI laid out the framework for Scale Based Regulation SBR) for NBFCs and categorised them into three broad categories: