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India announces tighter non-bank sector regulations to take effect Oct 2022

India announces tighter non-bank sector regulations to take effect Oct 2022

The Reserve Bank of India on Friday released a final set of tighter, bank-like regulations for the non-bank finance sector to ensure better monitoring and prevent any failures from having negative consequences on the financial world.

Since late 2018 when one of the largest firms, Infrastructure Leasing & Financial Services, collapsed due to fraud allegations, the central bank has gradually begun to tighten rules for non-banking finance firms (NBFCs).

Dewan Housing Finance Corp and Altico Capital failed to pay bills the following year, while Srei Infrastructure Finance joined the list in 2021.

"Many businesses have grown and become systemically significant, and there is a need to align the regulatory framework for NBFCs with their changing risk profile," RBI said.

The new framework will have a four-tier structure, with 25 to 30 of the 9,000+ NBFCs in the top two tiers with the most stringent regulations.

"Ideally, the top layer will remain empty. If the Reserve Bank is of the opinion that there is a significant increase in the potential systemic risk from certain NBFCs in this layer, this level may be filled. According to RBI, such NBFCs will move to the top layer from the bottom layer.

The central bank said that NBFCs that do not use public funds or have any consumer debt exposure have a different risk profile and will need different regulatory treatment, and the RBI will draw up separate regulations for them.

It further stated that exposure to capital markets, both directly and indirectly, as well as commercial real estate, will be treated as sensitive areas for NBFCs and that they will have to establish board-approved internal limits for such exposures separately.

It also set a 100 million rupees per borrower limit for financing subscriptions to initial public offerings, and allowed individual businesses to set even more modest limits if they so desire. The IPO funding ceiling will be in effect in April, according to the central bank.

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