RBI eases compliance for smaller NBFCs; Capitalmind's Deepak Shenoy calls move huge

The Reserve Bank of India (RBI) on Friday introduced significant regulatory changes for non-banking financial companies (NBFCs), aiming to reduce compliance requirements for smaller entities while maintaining financial stability.

RBI Governor Sanjay Malhotra announced that NBFCs with assets under Rs 1,000 crore, with no access to public funds and no customer interface, will no longer need to register with the central bank. This is expected to ease operational constraints and encourage new entrants.

Deepak Shenoy, Founder and CEO of Capitalmind, called the move huge. He said, "Nbfcs with no access to public funds and assets upto 1000 cr don't need rbi reg! This is huge! This basically removes the entire. 50:50 rule that prevents us from creating companies only for the purpose of investing!"

Previously, the 50:50 rule required entities with at least half of their assets and income as 'financial' to register as NBFCs. Shenoy noted this created hurdles for family offices and collective investment structures.

He explained, "There's a rule by the RBI. If you have 50% of your assets are 'financial assets' (including mutual funds, shares etc but FDs are ok) and 'financial' income is more than 50% (dividends, capital gains, interest etc but not FD interest) Then you were supposed to register with the RBI as an NBFC. This creates a problem for a 'friends and family' fund structure created as a company. You can pool in money together, and use that to invest - in startups, in public markets, in bonds, whatever. But since most of the income and assets are financial, you need registration with RBI as an NBFC! What RBI has done today is to remove that requirement if you're less than 1000 cr. in assets, and don't have any customer interface or take money from the public. Great to create new funds that are primarily pooled family or friend vehicles in India," he stated in the next X post.

"This will eventually create competition of us, as a mutual fund, but I would say this: let a 1000 fund managers bloom. India doesn't have as many privately held funds as we should. Our family offices usually invest in each family member's name, separately, because a collective investment would trigger NBFC clauses. A few people that come together to invest shouldn't have to do something as gargantuan as an RBI registration. Very progressive. Early stages yet. But it will benefit the investment attitude in the country," he added.

Shenoy also praised the RBI's tightening of regulations on the sale of third-party financial products by banks. He remarked, "Finally RBI sets up to put responsibility on banks to not abuse trust by misselling third party products. Rules will come that say analyze suitability before selling. Hopefully the age of selling locked insurance policies to retired people is over," he said in another post.

Meanwhile, domestic equity benchmarks were trading higher in Friday's late trading session, driven by gains in consumer stocks, financial services and private banks.