NBFCs need to focus on compliance, risk and liquidity, says RBI executive director R Lakshmi Kanth Rao
Mumbai, Jun 21, 2024
Synopsis
Non-banking finance companies (NBFCs) were advised by RBI executive director R Lakshmi Kanth Rao to prioritize compliance, risk management, liquidity management, and customer protection. Rao emphasized the regulatory differences between banks and NBFCs, noting the need for NBFCs to enhance compliance systems and balance business with prudence.
Compliance, risk management, liquidity management and customer protection are the areas that non-banking finance companies (NBFCs) need to focus on in the near future, Reserve Bank of India (RBI) executive director (ED) R Lakshmi Kanth Rao said.
NBFCs cannot expect to be treated on par with banks because they are regulatorily different Rao told an audience of top executives at a conference organised by industry lobby group Assocham.
"Difference is required because banks are, banks and they are special and NBFCs are non-banks. The way they (NBFCs) are conceived, in the way they operate, they are different from banks," Rao said.
In India, the share of NBFC to bank credit is around 30% and growing and hence are interconnected with the banks both in business as well as financial stability.
Rao said though NBFCs have been seeking a level playing field with banks it "is a very dicey thing" because it will make other banking regulations applicable which "might not be palatable to NBFCs."
"In enforcement for example RBI has been pretty active. (But) the penalty amount for that is only 10 lakhs for NBFCs, whereas it is 1 crore per bank... sometimes before one seeks something, one expects something, one should be aware of the benefits of that," Rao said.
He said regulatory compliance by NBFCs has gone up but not all NBFCs have proper compliance systems. Rao said NBFCs need to balance business with prudence and compliance.
"Compliance is the most essential aspect. If there is no compliance, there could be problems. Your business also will get into problems, as we all know," Rao said. Rao also drew from his previous experience as a banking ombudsman in Chennai with the RBI and pointed customer protection as an area that needs a lot of improvement.
"Especially in the area of transparency, pricing nd various other practices and charges that NBFCs impose. There is a need to keep the customer at the center of it and ensure that customer is not annually, you know, put into any loss," he said.
He said NBFCs need to also look at managing their liquidity risk and diversify their funding sources. "That is the real issue all NBFCs are having. And that is something going forward they need to really look at it with also the concentration of funding sources. Of course, the cyber security is extremely important, especially more and more you increase in scale and use technology," Rao said.
Also speaking at the same conference State Bank of India (SBI) managing director for corporate banking and subsidiaries Ashwini Kumar Tewari flagged the risks of NBFCs having multiple banks as lenders.
"Of course, they (NBFCs) say that it is because of the flexibility it provides in terms of availability of credit and pricing amongst banks. But my counter-argument to that always is that a similar-sized manufacturing company or a service company does not need so many banks. So the same amount of credit. Then why should an NBFC need so many banks?" he said.
Tewari said that with many banks involved with a smaller share in a large credit size means that the follow-up and the control mechanism on the portfolio then is lesser.
"That is something we are not very comfortable with. So, therefore, this is one area which I think has to be seen. We have also flagged this to the regulators that we have to do something about this. Now, nobody wants a capping of the number of banks It's best left to the consortium and the banks. But I guess there is a need for a consortium kind of arrangement where at least one or two banks or three banks together will get all the information, will be able to assess and look at the portfolio critically. Otherwise, each bank gets a separate list of debtors and then each bank has to do a sample check. But it's not a good way of how a large value credit should be handled," Tewari said.
With the interconnectedness, of the sector to banks through direct lending to NBFCs, co-lending, portfolio purchases etc there are a large amount of linkages between the banks and NBFCs and therefore diversification of resources is important, Tewari said.
[The Economic Times]
