Impact of RBI guidelines on NBFCs
The Reserve Bank of India (RBI) has
taken a keen interest in Non-Banking Financial Corporations (NBFCs) in recent
times. If one looks at the official website, the most number of announcements
and declarations have come in 2017 and 2018. The major announcements include
the Ombudsman directive, the P2P lending platform guidelines and the
categorization of NBFCs. Each of these regulations have their specific features
which will have their unique impact on the lending sector. The financial
analysts at Prest Loans (www.prestloans.com)
present an analysis of the impact of these guidelines covered with where NBFCs
and the RBI might be headed.
We should start with a brief history
of how NBFCs have been regulated. India has always had an active undercurrent
of lending activity that was carried out outside the scope of traditional
banking. NBFCs sought to regularize that trade and give it more structure and
organization while still being nimble and swift when compared with their
banking counterparts. The growing credit demand of the nation and the growth of
information technology both fueled the growth of NBFCs, who used the latter to
build the required expertise to quench the former. Hence, the amendment of the
Reserve Bank of India Act, 1934 (into RBI Act, 1997) captured greater detail
about NBFCs1. On May 30, 1998, SP Talwar introduced the regulatory
framework for NBFCs in a landmark seminar2 where the role of NBFCs
in performing “financial intermediation” was mentioned. Regulations continued
to appear (Banking developers and perspectives3 and the extremely
important, Non-Banking Financial Companies, 20034 and many more).
The way RBI has been looking at NBFCs
has also changed over time. The initial classification was very rudimentary4
where NBFCs, “Nidhi companies” and chit-fund companies were recognized. Today,
the classification includes about a dozen clearly defined norms. An Asset
Finance Company (AFC) is a kind of NBFC which lends to enable economic activity
for companies dealing with automobiles, tractors, lathes etc. An Investment
Company deals with the acquisition of securities. A Gold Loan NBFC company which
majorly provides loan against gold as security, similarly Micro Finance NBFCs
(MFIs) focused on loans to small help groups. A Loan Company (LC) helps in
providing loans for any other activity other than the ones carried out by AFCs.
This show the RBI has built a much better clarity of how to look at and
identify NBFCS. Further, NBFCs have been categorized based on asset size as
well.
RBI has continued its work onto the present
day on the NBFC sector. The most recent one causing waves is the one which says
that the RBI will appoint an Ombudsman5 to be the point of contact
for complaints. These complaints range from non-payment of interest to levying
of hidden charges. They also include the provision of the failure to ensure
transparency in the lending process (it will be interesting to see how this
transparency is actually interpreted in practice). The Ombudsman directive also
makes the previous RBI guidelines even more important as one of the complaint
clauses is also the failure to adhere to the RBI guidelines! This puts a lot of
pressure on existing NBFCs to appoint Nodal Officers (the regulation included
that as well) who will liaise with the Ombudsman to resolve the complaint. This
also means that the activities of the NBFC is under much greater scrutiny than
ever before.
One of the other epoch-making
regulation is about P2P Lending Platforms6. The regulation specified
that the business of such a platform be “primarily Information Technology (IT)
driven” before going to specify regulations about security and business
continuity. This was a very modern outlook conveyed by the RBI which forever
cemented the importance of technology for NBFCs. The regulation also stipulated
the funds transfer mechanism through escrow account mechanisms. It also
highlighted reporting requirements and reinforced the need for nodal officers
to report to the Ombudsman. Hence these kind of regulations proved that the RBI
was indeed taking NBFCs very seriously and that they would consider them to be
instrumental for the economic growth of the nation and financial inclusion.
The future for RBI and NBFCs
NBFCs are going to grow to tap into
unreached territory and business areas. NBFCs like Prest Loans (www.prestloans.com) also expanding their business
borders to stay innovative in the new financial age. There is still a lot of
unmet credit demand which banks are trying to fulfill by merging or partnering
with smaller technology companies to float more interesting offerings. The RBI
is going to monitor the NBFC space even more closely. As a future trend, it
will be seen that more and more larger corporations will have their NBFC
offshoot that will even operate as an independent firm (to be free of any
bureaucratic hurdles which will otherwise defeat the purpose of having a NBFC).
It will be interesting then, to see, the kind of regulations that will come
into being to better govern such spaces.
Sources:
Comments
Post a Comment