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Teji Mandi: RBI increases focus on reviving NBFCs and restoring the sector's credibility

06:18 PM Feb 17, 2021 | Teji Mandi

NBFCs were left alone for a long time to fight the battle on their own. Amid the rising level of stressed assets, RBI's focus was pinned on helping banks. NBFCs were made to wait. The RBI kept delaying the support that the sector required. Be it an ease in moratorium norms, interest on interest payment, or getting access to liquidity.

NBFCs back on radar :

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A lot has changed after the lockdown. The economy is heading towards normalization. There is a lot more clarity on the stressed assets situation. Hence, the central bank has finally managed to shift its focus back on the industry.

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In a recently published paper, the RBI has proposed banking-like regulations for the upper layer NBFCs to make them ready for operations. This will help NBFCs achieve management efficiency. And, make them better prepared to tackle the financial crisis.

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The NBFC industry has also welcomed the proposal. However, they are in favor of a gradual shift towards adopting banking norms. They have advocated for a transitory period of 3-4 years as the sudden move will have a crash landing effect.

The NPA recognition period for NBFCs stands at 180 days currently vs 90 days for the banks. The sudden transition would create an accounting nightmare for them. Similarly, these NBFCs are also seeking flexibility on issues like deposit acceptance, fundraising through ECBs, and setting up overseas subsidiaries.

RBI issues circular on risk-based internal audit for NBFCs and Urban Cooperative Banks

Liquidity measures in monetary policy :

Apart from regulatory support, RBI is also seen addressing the liquidity woes of the NBFCs. in its latest monetary policy, the RBI has extended Targeted Long Term Repo Operations (TLTRO) support for NBFCs as well.

In October 2020, the Reserve Bank had announced a TLTRO scheme worth Rs 1 trillion. It aimed to provide liquidity support to various sectors and banks. However, RBI had maintained a cautious stance and excluded NBFCs from it as the stressed asset situation was still evolving.

Closing comments:

The ability of NBFCs to achieve last-mile connectivity makes them a systemically important sector. The RBI understands the importance of these shadow lenders. Its importance has also grown manyfold at a time when the government wants to increase credit offtake to push the economy forward.


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Teji Mandi: Will RBI's proposed regulatory framework for NBFCs be effective?

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