Looking at the number of banks collapsing during the pandemic, The Reserve Bank of India had recently made a proposal wanting to put the Non-banking financial companies into a list of four categories. RBI proposes to put more harsh regulations for the large shadow lenders so that the downfalls that happened earlier are not repeated. The harsh effects of the collapse of a major financier way back in 2018 continue to affect the financial system of the country. Just to stabilize the economic status of the country, RBI has proposed.
The Reserve Bank of India wishes to put all the Non-banking finance companies (NBFC) into four categories including the size of assets. All the information was revealed on Friday in a discussion paper released. The proposal mentioned imposing a 9 percent core capital requirement on the NBFCs who belong to the top-tier. This is a requirement that is similar to that applicable to the banks. Also, the NBFCs will be allowed to take on just a limited amount of leverage.
The discussion paper released followed a speech that an RBI top official who is in charge of the banking regulation made in November about the big shadow lenders converting into banks or scaling down their operations. It was noted that due to lenient regulations on them, the shadow banks have become a major source for last-mile credit in the country. Simultaneously, some piled on risk like providing long-term loans bringing in short term cash has created a lot of problems for the economic condition in India. This risk led to the downfall of an infrastructural financier in 2018 along with the seizure of a mortgage lender the next year. A situation of having no finances at all or a cash crunch was also witnessed.
Keeping this in view, RBI has tightened the regulations applicable to these financial entities. They want the banks and NBFCs to not be built solely on arbitrages. The Regulatory arbitrage for that matter has been narrowing and oversight on the sector has been increased to reduce further problems.