RBI Annual Report: RBI to strengthen NBFC regulations in 2023-24, to examine licensing requirements

NBFCs are connected with banks as these firms borrow from commercial banks to online to their customers

The Reserve Bank of India (RBI) will strengthen non-banking financial companies (NBFC) regulations in fiscal year (FY) 2023-24, to examine licensing requirements, the central bank's annual report said.

Over years, the RBI has been tightening scrutiny of NBFC regulations. This exercise intensified particularly after the collapse of IL&FS and DHFL.

"The central bank's department of supervision will work on the examination of licensing requirements for NBFCs and initiating supervisory action against non-compliant NBFCs in 2023-24," the report said.

NBFCs are connected with banks as these firms borrow from commercial banks to online to their customers. Data from RBI's sectoral credit data showed that banks’ outstanding credit to NBFCs till March 2023 rose by 30 percent to reach Rs.13.31 lakh crore from Rs 10.22 lakh crore in March 2022.

Also read: NBFCs brace for tougher year as tight RBI regulations, competition pose challenges

"The growth has remained robust due to high growth in the NBFC asset book and as additional borrowings moved to banks due to differentials between market yields and interest rates offered by banks and lower borrowings in the overseas market," rating agency CareEdge said in a report.

Moneycontrol had earlier reported that India’s NBFCs may have a tough year ahead on account of tight regulations from RBI and intense rivalry from competition.

On tighter regulations, industry experts highlighted the sector is likely to see more tightening by the central bank this year, which could impact their core lending business.

“On the compliance part of NBFCs, we can expect tougher guidelines alongside new changes which can affect the core business,” said Varun Sharma, Director - Advisory - FinAccountants, an NBFC solutions and advisory company.

Sanjay Agarwal, Senior Director at Care Ratings, said that RBI is working towards bringing the NBFC sector under the broader regulatory umbrella.

“RBI is harmonising the regulatory measures of NBFCs and banks. This, in turn, would push NBFCs to focus on their lending business,” Agarwal said.

Why tougher regulation?

Experts said that the growth recorded by NBFCs and the tight and tough competition with some banks (mainly small finance banks) and fintech pushed the need for strict regulation

RBI’s financial stability report highlighted that loans to the services and personal loans sector recorded a healthy growth rate, whereas the industry sector saw marginal decline.

Data from the RBI showed that on a year-on-year (y-o-y) basis, the services sector saw 14.5 percent growth from 12.5 percent last year.

And the personal loan sector saw 29.5 percent growth from 28.6 percent last year.

Whereas the industry sector saw 37.5 percent growth compared to 40 percent growth last year.

Experts highlighted that competition among NBFCs will intensify as sector players are working on bringing new technological amendments in operations and services.

“NBFCs are in competition with each other, and banks are a distant player for now. But we are witnessing that many NBFCs are working towards introducing more technological aspects to become unique compared to other players,” Sharma said.

Agarwal explained: “This year will be more competitive for NBFCs as looking at the sector’s growth in the last five years, there is still scope for growth.”

Experts said 2023 could be a mixed bag for NBFCs as regulations from RBI could be tightened and brought under a wider ambit.

With this, competition and the race to provide quicker and advanced services could lead to a market situation where one could either see immense growth or introduction of newer challenges in the sector.