The Reserve Bank of India has proposed an overhaul of the non-banking financial companies (NBFCs) and recommended a scale-based approach, with stricter regulation and governance norms, according to a discussion paper released on Friday.
"Higher risk appetite of NBFCs has contributed to their size, complexity and interconnectedness making some of the entities systemically significant, posing potential threat to financial stability," the RBI said.
RBI moved towards tighter norms for the sector after Infrastructure Leasing & Financial Services, the largest NBFC, went bankrupt in 2018, and Dewan Housing Finance Corp and Altico Capital defaulted on payments in 2019.
The proposed regulatory and compliance guidelines will bring the 25-30 large shadow banks to parity with the state-owned and other private commercial banks in the country. New norms have also been suggested for the mid to smaller NBFCs but they are likely to be less stringent.
The RBI has proposed that the large shadow banks have a Common Equity Tier 1 capital of 9% and be subjected to a differential provisioning requirement on their exposure, in line with banks.
They will also be required to list on the stock exchanges mandatorily within a specified period of time to ensure greater disclosure. Currently RBI paper recommends their business conduct and disclosure norms be at par with that of banks.
"In the past we have seen that the shadow banks have resorted to aggressive lending in the absence of such regulatory measures," said Avneesh Sukhija, senior analyst at BNP Paribas.
"To curb aggressive lending and avoid any systemic risk (seen in 2018), additional regulatory measures in a phased manner is the right way forward," he added.
The size of the balance sheet of shadow banks including housing finance companies has more than doubled to 49.22 trillion rupees in 2020 from 20.72 trillion rupees in 2015, the RBI said.
"Cost of compliance to rules and regulations should be perceived as an investment as any inadequacy in this regard will prove to be detrimental," RBI Governor Shaktikanta Das had said in a speech last Saturday referring to increased regulation in recent years for banks and shadow banks.