Self-regulatory structure for non-banks a welcome move, experts say

Industry players and representatives from industry bodies said that they are looking forward to the formation of a SRO.

As the Reserve Bank weighs creation of a self-regulatory organisation (SRO) for non-bank financiers, experts warn that there are chances of stricter compliance and governance standards.

The Reserve Bank of India (RBI) on June 19 invited applications for recognition of SROs for the NBFC sector. “The RBI's well-intentioned move is aimed at ensuring the SROs have the necessary resources and stability to effectively self-regulate the NBFC industry. The industry stakeholders should be ready for stricter compliance and adherence to governance standards prescribed by the regulator," said Sharat Chandra, who founded EmpowerEdge Ventures.

Also read: Concerns over asset quality, risk management may have prompted RBI's crackdown on NBFCs: Experts

The SRO for NBFC sector is primarily envisaged for NBFCs in the categories of investment and credit companies (NBFC-ICCs), housing finance companies (HFCs) and factors (NBFC-Factors), the central bank said. The recognised SRO shall have a good mix of NBFC-ICCs, HFCs and NBFC-Factors as its members, it said.

To ensure fair representation to smaller NBFCs, the RBI said that the SRO shall have at least 10 percent of the total number of NBFCs in the base layer as per scale-based regulatory framework and categorised as NBFC-ICC and NBFC-Factor as its members.

Industry players and representatives from industry bodies said that they are looking forward to the formation of an SRO. “The SROs for the NBFC space would have a blend of several industrial players; both large and small. This could mean well for the growth of the larger NBFC space,” an executive from a NBFC said.

RBI hammer on NBFCs

On March 5, the central bank barred JM Financial Products from issuing loans against shares and debentures, including sanctioning and disbursing loans against the initial public offering (IPO) of shares. In addition, some media reports said the Securities and Exchange Board of India (Sebi) will soon come out with an order on JM Financial Products for its alleged role in inflating its IPO price.

A day earlier, the RBI asked IIFL Finance to stop sanctioning or disbursing gold loans with immediate effect, noting "supervisory concerns" in the company's gold loan portfolio.

Also read: RBI top official asks NBFCs to bolster governance practices

On January 31, the RBI imposed business restrictions on Paytm Payments Bank, citing repeated violations of norms and non-compliance with multiple rules. And on November 15, the RBI directed Bajaj Finance to stop sanctioning and disbursing loans under its two lending products, ‘eCOM’ and ‘Insta EMI Card’, with immediate effect.

Additionally, RBI deputy governor Swaminathan J on May 15 urged non-banking finance companies (NBFCs) to maintain constant vigil against potential risks and vulnerabilities in the financial system and boost governance functions.

“NBFCs to bolster governance and assurance functions and maintain constant vigil against potential risks and vulnerabilities,” Swaminathan told NBFCs at a conference organised by the RBI in Mumbai on May 15 for the heads of assurance functions (i.e., chief compliance officers, chief risk officers and heads of internal audit) of select NBFCs.

Swaminathan further said in the highly dynamic and challenging environment in which financial entities operate, they are exposed to a multitude of risks that can impact their financial and operational resilience.