The Reserve Bank of India (RBI) has recently said that it will not exempt non-banking financial companies (NBFCs) from stricter bad loan rules, which are to be adopted soon. Many NBFCs have asked the RBI to exempt smaller loans from the rules, as it might pose a challenge to the NBFC sector.
Talking about the new regulations that will be effective next month, Ramesh Iyer, Vice-chairman and Managing Director of Mahindra Finance, a rural-focused NBFC, said that the regulations are getting tighter over time, but they are making the business model stronger and more relevant.
“More regulations will bridge the gap between a banking format and the NBFC format, and it would make the surviving NBFCs stronger at every stage. There should be a model that is relevant at every stage,” Iyer said in an exclusive interview with Business Today.
Industry leaders have been talking about stricter rules on the NBFC sector considering the recent incidents like the IL&FS default, and DHFL fiasco. It is to be noted that as per RBI regulations, NBFCs have to follow certain rules on identifying and disclosing non-performing assets (NPAs) as per the asset classification norms. The rules for the banks are a bit different. Under the new norms, NBFCs will have to tag bad loans on a daily basis, rather than monthly. NPAs can only be made regular accounts after borrowers have paid all arrears.
As per its business model, the NBFCs borrow money from the banks and lend the money to their focused customers. Higher levels of defaults by NBFCs could pose a serious challenge to the banking sector. Therefore, the RBI is looking for ways to reduce the defaults. Talking about the survival strategy of NBFCs, Iyer said the central bank is always checking whether an entity has enough money to write a loan. “The regulator’s role is to see ensure that the operating companies are adequate in facing any eventuality,” he said.
A recent CRISIL report noted that the NBFCs might see an 11-12 per cent growth in their assets under management (AUM) by the end of this fiscal mainly due to positive business outlook and macroeconomic tailwinds. Talking about the business growth and entry of big names like Godrej, Adani, Poonawalla Fincorp, Iyer said: “If you look at credit penetration in our states, it is still not very high in our country. Therefore, there is room for many more.”
“But to remain relevant in the field, one has to look at with what purpose the NBFC was set up. It should be clear why are you setting up the finance company, and to do what. There are many fields to be explored like vehicle finance, SME financing, and financial inclusion. Many of these have not been met. Therefore, there is scope for many (players) in the field".
Talking about large NBFCs turning into banks, Iyer said that it is a great opportunity and that large NBFCs should never ignore that opportunity to become a bank. “We would look at this very closely as it is a great opportunity. Despite all the new regulations and other changes in the sector, NBFCs have a significant role to play even if you stay with vehicle financing. Vehicle financing is a big segment and NBFCs have a great role in this. Companies which want to get into all types of financing should look at becoming a bank.”
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