The Reserve Bank of India (RBI) on Friday issued a discussion paper on a scale-based regulation of non-banking finance companies (NBFCs), inviting comments from companies, market participants and other stakeholders within one month. The discussion paper has proposed tighter norms for large NBFCs and creation of a multilayer structure to categorise the industry players. It also sets out slew of policy measures to conserve capital among banks and NBFCs through regulatory initiatives.
The objective of these scale based regulatory guidelines are to ensure that all NBFCs, irrespective of their size, have sufficient flexibility to operate and grow. The development came in wake of recent failure of NBFCs and growing need to keep them resilient by reining them in, improving their governance standards and also fool-proofing their risk management and internal controls.
"Regulatory regime governing the NBFC sector is built on the principle of proportionality such that adequate operational flexibility is available to the sector through calibrated regulatory measures. However, there are rapid developments in the last few years, which have led to significant increase in size and interconnectedness of the NBFC sector. There is, therefore, a need to review the regulatory framework in line with the changing risk profile of NBFCs," the RBI said.
"It is felt that a scale-based regulatory approach linked to the systemic risk contribution of NBFCs could be the way forward. It has been decided to carry out consultation with stakeholders before finalising the revised regulatory framework," the apex bank added.
On the supervisory side measures, RBI said large NBFCs and urban cooperative banks(UCBs) will have to submit a risk-based internal audit and a harmonised guidelines for appointing statutory auditors for commercial banks, UCBs and NBFCs with a view to improve the quality of financial reporting.
Regarding the new dividend distribution policy for NBFCs, RBI said unlike banks, currently there are no guidelines in place with regard to distribution of dividend by NBFCs.
A draft circular on the proposed criteria and parameters has been releases for public comments.