RBI plans scale-based regulatory approach for NBFCs

By Ankur Mishra

The Reserve Bank of India (RBI) on Friday announced a slew of measures for non-banking financial companies (NBFCs) to enhance resilience and improve their risk management systems. RBI governor Shaktikanta Das said a scale-based regulatory approach linked to the systemic risk contribution of NBFCs could be the way forward.
“This regulatory regime based on the principle of proportionality warrants a review. It is felt that a scale-based regulatory approach linked to the systemic risk contribution of NBFCs could be the way forward,” Das said. The RBI will issue a discussion paper before January 15, 2021 for public comments, he added.

Anil Gupta, vice president, ICRA, said like banks, this could include more regulatory filings at higher frequency by NBFCs to the RBI for effective monitoring. “While this may increase compliance burden on larger NBFCs, it will be positive for systemic stability and also nudge larger NBFCs to convert to a bank.”

RBI governor called upon the financial sector entities to give the highest priority to quality of governance, risk management and internal controls as these are the first line of defence in matters related to financial sector stability. The 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.

While the regulator directed banks not to make any dividend pay out from the profits pertaining to financial year 2019-20, it said that a transparent criteria would be formulated for declaration of dividends by different categories of NBFCs. Regarding the new dividend distribution policy for NBFCs, the RBI said unlike banks, currently there are no guidelines in place with regard to distribution of dividend by NBFCs. This has made it imperative to enhance the resilience of NBFCs by putting in place a transparent criteria according to a matrix of parameters for declaring dividends by different categories of NBFCs, the regulator said.

Speaking on the new dividend policy for NBFCs, Anil Gupta said given the uncertainty on the asset quality, curtailment of dividend for banks is a positive move from a capital conservation point of view. “Many larger NBFCs have continued to pay dividends in financial year (FY) 2021 from profits of FY 2019-20, despite some of them raising capital in FY2021,” he added.

RBI has also asked banks and co-operative banks not to make any dividends for the financial year ended March 2020. In view of the ongoing stress and the heightened uncertainty on account of the pandemic, RBI said it is imperative that banks continue to conserve capital to support the economy and absorb losses, if any.