RBI calls for collaboration, innovation, and risk management in NBFC sector

The Reserve Bank of India (RBI) on Friday said it is committed to fostering a robust and innovative Non-Banking Financial Company sector that would ensure financial stability in the country. The NBFC sector is significant, accounting for around 30% of the total bank credit in India and plays a crucial role in credit intermediation. RBI Executive Director Lakshmi Kanth Rao said the interconnectedness of the NBFC sector with banks poses systemic risks.

While addressing the Assocham 10th National Summit on NBFCs & Infrastructure Financing, Rao said:  “The RBI's role encompasses regulation, supervision, consumer protection, and enforcement. The developmental role has always been there, and we strive to streamline the regulatory framework to address risks while enabling the development and growth of these entities and fintech.” 

Rao highlighted the importance of compliance and customer protection for NBFCs in the changing financial arena. “NBFCs are a critical part of the financial system, contributing to diversification and innovation. However, their growing size necessitates a shift from pure activity-based regulation to a framework that considers both activity and scale to effectively manage risk. There could be lesser importance given to compliance due to lighter regulations in the past. However, with increased scale, NBFCs are required to meet stricter compliance requirements. They need to diagnose their compliance systems and adhere to the guidelines issued by RBI.”

Stressing the role of RBI and the importance of joint efforts, Rao said the risks associated with infrastructure financing are well-known. For it to thrive, collaboration among all stakeholders, including banks, NBFCs, and the government, is essential. 

“We have called for applications for Self-Regulatory Organizations (SROs). This is a developmental aspect where NBFCs can play a strong role in regulating themselves. The sector itself needs to have strong regulatory standards to ensure there are no regulatory gaps,” Rao said.

Calling for collaboration and innovation among traditional banks, NBFCs, and the capital markets to strengthen infrastructure financing, SBI MD Ashwini Kumar Tewari said, "There's a long way to go for NBFCs in infrastructure financing. While regulations have rightly evolved and tightened recently due to past incidents, NBFCs have the potential to significantly contribute to this sector." 

"The growing dependence of NBFCs on banks for funding increases risk for the entire banking system. The bank lending to NBFC has gone up significantly. It used to be around 20%, but in the last round, I think December or February numbers, if I recall correctly, it's closer to 50%. Now, if 50% of the NBFC book is financed by banks, then we have to take the risk. And therefore, the regulations which apply to banks possibly also need to be applied to NBFCs to ensure a more balanced and secure financial landscape."

Looking towards the future, the SBI MD said: "The bond market remains an underutilised avenue for long-term infrastructure financing. Partial credit enhancement mechanisms can play a vital role in attracting investors by mitigating risk and encouraging participation in these essential projects."

Speaking on the need of large capital in infrastructure financing space, Virender Pankaj, CEO, Aseem Infrastructure Finance, said: "For a country like India where capital formation and whatever savings we have is not going to be enough for this which means we need very large amount of private capital, very large amount of global capital to come in. Global capital is inversely proportional to the risk perception so lesser are the risk associated or what is called India risk in global markets. Lesser is the India risk more is the capital available because there is no dearth of capital available in the world, in fact, it is the other way round, there are fewer places to invest but risk is very important."