Gist of Editorials: Harmonising NBFCs | GS – III


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.

Harmonization

  • 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?

Way forward

  • 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.