Must address systemic risk arising out of growing NBFCs: RBI deputy governor M Rajeshwar Rao

It is in this background that the RBI has conceptualised the scale-based regulatory framework.

As the non-banking financial company (NBFC) sector increases in size and complexity, there is regulation needs to address the systemic risks arising out of it, Reserve Bank of India’s (RBI) deputy governor M Rajeshwar Rao said on Friday. Referring to the central bank’s proposal to apply scale-based regulation to NBFCs, Rao said that NBFCs must keep the customer at the centre of all innovation and address concerns around governance.

“While we are aware that differential regulation in the NBFC sector is required to allow it to bridge the gap in last mile connectivity and exhibit dynamism, this premise remains valid till the time their scale of operations is low. As and when they attain the size and complexity which poses risk for the financial system, the case becomes stronger for greater regulatory oversight,” Rao said during a virtual event organised by the Confederation of Indian Industry (CII).

It is in this background that the RBI has conceptualised the scale-based regulatory framework. Such a framework, proportionate to the systemic significance of NBFCs, may be the optimal approach where the level of regulation and supervision will be a function of the size, activity, and riskiness of NBFCs, Rao said. As regulations would be proportional to the scale of NBFCs, they would not impose undue costs on the regulated entities (REs). “While certain arbitrages that could potentially have adverse impact would be minimised, the fundamental premise of allowing operational flexibility to NBFCs in conducting their business would not be diluted,” Rao said.

The deputy governor observed that there has been a consistent and conscious understanding that a one-size-fits-all approach is not suitable for the NBFC sector, which includes a diverse set of financial intermediaries with different business models serving a heterogenous group of customers and exposed to different risks.

Rao cautioned that no innovation should come at the cost of prudence and it should not be designed to cut corners around regulatory, prudential and disclosure requirements. “Responsible financial innovation should always have customer at its centre and should be aimed at creating positive impact on the financial ecosystem and the society. One should therefore consider the impact of new ideas on the financial fabric at the conceptualisation stage itself,” he said.

The deputy governor referred to the surge in digital credit delivery during the pandemic and said that 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. “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,” Rao said.

He added that governance is more of a cultural issue than a regulatory issue. Therefore, NBFCs must create a culture of responsible governance where every employee feels responsible towards the customer, organisation and society. “Good governance is key to long-term resilience, efficiency and might I add, survival of the entities,” he said.

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