Calibrated & graded regulatory framework, proportionate to systemic significance of entities is the way forward for NBFC sector: RBI deputy guv

Friday, November 06, 2020

New Delhi, 06th November 2020:
Considering that uniqueness of NBFC sector lies in the inherent diversity of activities carried out by different NBFCs, there can be no ‘one-size-fits-all’ prescription in terms of their regulation, a top Reserve Bank of India (RBI) official said at an ASSOCHAM e-summit today.
“Perhaps a calibrated and graded regulatory framework, proportionate to the systemic significance of entities concerned is the way forward,” said Mr M. Rajeshwar Rao, deputy governor, Reserve Bank of India (RBI) at an ASSOCHAM NBFC e-Summit - “Stability & Sustainability of Financial Sector.”
He also said that there is a need to recalibrate regulations for NBFCs that are neither critical in terms of systemic risk nor too small in their scale and complexity and enjoy great degree of regulatory arbitrage vis-à-vis banks.
“As a group, these entities can contribute to build-up of systemic risks because of the regulatory arbitrage enjoyed by them,” he said.
Mr Rao also said that it is imperative to strike a balance between regulating the NBFCs more tightly and the need to provide them the required flexibility. “This will remain the cornerstone while we imagine the future of regulation for NBFCs.”
He added, “We could perhaps consider a graded regulatory framework for NBFCs calibrated in relation to their contribution to systemic significance.”
Addressing the delegates during the ASSOCHAM e-summit, Mr Rao further said, “NBFCs with significant externalities and which contribute substantially to systemic risks must be identified and subjected to a higher degree of regulation.”
Touching upon the regulation of microfinance sector, Mr Rao said that there is a need to re-prioritise the regulatory tools in the microfinance sector so that regulations are activity-based rather than entity-based. After all, the core of microfinance regulation lies in customer/consumer protection.
Talking about regulation in the FinTech sector, he said that peer to peer (P2P) lending, account aggregator (AA), and credit intermediation over ‘only digital platform’ are case in point where the regulations have helped the industry to grow in a systematic and robust manner.
“While making regulation for the future in FinTech area, orderly growth and customer protection and data security will remain the guiding principles for the RBI,” said Mr Rao.
Noting that ensuring good corporate governance in NBFCs is at the core of any regulatory change, Mr Rao said, “Good governance would be a natural outcome if promoters/owners and senior management are fundamentally ‘fit and proper’. It is extremely critical that appropriate filtering mechanisms are in place to allow only the genuine and able promoters to start the business of NBFCs.”
He added that while the current mechanism within RBI focuses on providing NBFCs with the regulatory mandate to access public funds multiple times their net worth by issuing Certificate of Registration, there is a need to extend similar rigour of due diligence whenever there is a change in ownership/ control in an existing NBFC.
On the aspect of consumer protection and fair conduct, Mr Rao said that a transparent and self-disciplining mechanism has to be imagined for the future where the changing business models and newer credit delivery mechanisms do not deviate from the objective of fair treatment of the customer.
Talking about the impact of COVID-19 and disruptions in economic activity due to lockdown, the RBI deputy governor said that the pandemic led to building up of huge stress in the financial system. While the entire financial system was affected, the impact was significantly greater on NBFCs due to their underlying business models, thereby straining their profitability.
Amid others who shared their views during the ASSOCHAM e-summit included: Mr Vineet Agarwal, senior vice-president, ASSOCHAM & MD, Transport Corporation of India Limited; Mr Sunil Kanoria, past-president, ASSOCHAM and vice-chairman, SREI Equipment Financing Limited; Mr Ramesh Iyer, chairman, ASSOCHAM National Council for NBFC & vice-chairman & MD, Mahindra & Mahindra Financial Services Pvt. Ltd.; Dr Charan Singh, chairman, ASSOCHAM National Council for Banking & Non-Executive Chairman, Punjab & Sind Bank; Mr Deepak Sood, secretary general, ASSOCHAM and Mr S. Ramann, MD & CEO, National E-Governance Services Pvt. Ltd.

ASSOCHAM initiated its endeavour of value creation for Indian industry in 1920. It was established by promoter Chambers, representing all regions of India. Having in its fold over 400 Chambers and Trade Associations, and serving over 4.5 lakh members across India. ASSOCHAM has emerged as the fountainhead of Knowledge for Indian industry, which is all set to redefine the dynamics of growth and development in the Knowledge Based Economy. More information available on
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