Relevance : GS Paper III ( Economy)
Why has this issue cropped up?
The RBI recently spoke about harmonisation of the various categories of NBFCs.
Categories of NBFCs in India
- 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.
Problem with categorisation of NBFCs
Too many categories increase compliance cost for the industry and monitoring cost for the regulator.
- RBI will now recognise only two categories, NBFCs and CICs.
- It will effects future growth and business direction of NBFCs.
The issues that need to be addressed
The key questions that the RBI should address are:
- Should we have the same set of regulations for all NBFCs ?
- How can RBI enforce prudential risk measures for each asset class?
- Should banks and NBFCs operate under equitable regulations?
- Separate regulations for each activity will increase compliance cost.
- There is a need to differentiate between assets based on inherent risks.
- A risk weight mechanism based on the expected losses is the need of the hour.
- Allow the poor to monetize their meagre gold assets better by doing away with the cap.
- Gold loans by NBFCs do not get the priority sector lending status. This needs to change.
- While the RBI is the lender of last resort for banks, the NBFCs currently do not have any such institutional mechanism.