ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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To Regulate or Strangulate?

An Ethics-based Framework for NBFC Regulation

A critique aspect of the current regulatory framework for non-banking financial companies by the Reserve Bank of India shows that such regulations would stymie the growth of NBFCs, constricting their lending ability that has been affected by the pandemic. What is needed is regulation through incentives instead of the threat of penalisation.

The authors thank the anonymous referees for their valuable suggestions which helped improve this article.

Non-banking financial companies (NBFCs) are an important component of the financial system, displaying a consistent rise in their credit operations over the last decade. The sector is important to further the goal of financial inclusion, delving into markets underserved by the scheduled commercial banks (SCBs) due to their degree of operational freedom, which SCBs do not have. Notwithstanding the challenges from bank competition and the impact of COVID-19, NBFCs maintained ample liquidity, sufficient provisioning, and a healthy capital position for 2021–22.

Despite this, risk perceptions about the sector prevail, due to the association of the sector with crisis in some major firms like IL&FS and DHFL. In response to this, the Reserve Bank of India (RBI) had released a discussion paper titled, “Revised Regulatory Framework for NBFCs—A Scale-based Approach,” to serve as the guidelines for the regulation of NBFCs. It outlines a firmer approach to regulating this shadow banking sector with the goal of minimising systemic risks. The scale-based approach rests on the principle of proportionality, which emphasises that the degree of regulation should be commensurate with the risk the entity poses to the financial system. This approach can be explained in Figures 1 and 2.

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Updated On : 31st Jul, 2023
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