As Non-Banking Financial Companies have become systemically important, regulation must be on a par with scheduled banks to ensure financial stability. Discuss (200 Words)
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IAS Parliament 3 years
KEY POINTS
· NBFCs in India are shadow banking entities, with light-touch regulation from the RBI.
· Shadow banks are a group of financial intermediaries facilitating creation of credit in the financial markets but not subject to full-suit regulatory surveillance.
· This allows them to be agile to exploit new business opportunities but may also lead to creative accounting and financial engineering.
· In India NBFCs, typically, lend at high interest rates, by sourcing funds from commercial banks.
· Some public sector banks were put under the RBI’s Prompt Corrective Action framework, which restricted growth of their business.
· As a result, some NBFCs capitalised on this opportunity and expanded their balance-sheet size rapidly. In the process, NBFCs ended up giving loans to non-creditworthy/non-investment grade borrowers, too.
· They borrow through money market instruments such as Commercial Paper for cost effectiveness and keep rolling them over to fund their long-term loan assets, thereby facing asset-liability mismatches apart from liquidity and re-pricing risks.
· Systemic risks should be properly mitigated by preventing NBFCs from maintaining relationships with banks/financial institutions.
· The RBI has to ring-fence NBFCs by constantly monitoring them through CAMELS (Capital adequacy, Asset quality, Management efficiency, Earnings, Liquidity, Systems), and risk based performance supervision frameworks.
AZMI ALI 3 years
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IAS Parliament 3 years
