In an address at a conference on non-bank finance companies (NBFCs), Reserve Bank of India (RBI) Deputy Governor M Rajeshwar Rao voiced his scepticism regarding the increasing trend of NBFCs seeking bank licences. Rao's remarks, delivered during the event organised by the Confederation of Indian Industry (CII), underscored his concerns over the regulatory advantages already enjoyed by these entities.
Rao also expressed displeasure at certain peer-to-peer lending platforms for following business practices which are not in line with the licensing guidelines, and made it clear that such breaches were not acceptable. He also spoke about the constant demand from NBFCs to convert into banks, and made it clear that regulations for even entities in the top-most tier of NBFCs are not at par with universal banks, and NBFCs enjoy some advantages.
Rao's stance against the clamour for NBFCs to transition into banks was resolute, asserting that these institutions have carved out distinct roles in the financial landscape. "NBFCs have evolved as niche companies serving specific economic functions, and it is uncharacteristic of them to demand becoming like a bank," he remarked.
"Why not think of bank licences for at least a few of them, especially these NBFCs who have spent ten years, met the compliance requirements, have proved themselves," Bajaj explained using an analogy that an NBFC licence is like a learner's licence before an entity graduates on to become a universal bank which can access the cheap deposits. Specifically responding to this request, Rao said universal bank licences were made on-tap by the regulator a few years ago but conceded that no entity has received the nod to operate as one.
He said RBI is very clear in not allowing more NBFCs to accept deposits, and pointed out that not a single new licence has been granted, and the number of deposit-accepting NBFCs has reduced from over 200 to only 26 now. RBI has given a slew of advantages to NBFCs like easier or no entry and exit barriers, lower initial capital requirement at only ₹10 crore versus ₹1,000 crore for a universal bank and also no restrictions on the operations front whereas a bank has to get branch authorisations, he said.
"What I would like to emphasise is that the regulations for NBFCs, especially in the upper layer, are much more calibrated, but are not certainly at par with the regulations applicable to banks," Rao said. Meanwhile, he also highlighted the regulator's disenchantment with the microfinance companies for charging high-interest rates, stating that RBI is "not oblivious" to such practices.
"Some of the MFIs have increased their margins disproportionately under the new regime. We are not oblivious to the misuse of the freedom provided to the microfinance sector and some of the irresponsible practices, some of these entities (are practising) and more such instances do put pressure to act on these entities," Rao said. He added that there have been a lot of comments from the government officials as well on the issue of high-interest rates and asked for an "introspection" by the sector participants.
In 2021, RBI had given full freedom to entities on interest rates to be charged for microloans by lifting the interest rate cap of 24% put earlier. Rao also asked NBFCs to reduce the reliance on bank loans for their funding requirements by undertaking a diversification of their base to other market instruments.
He also said the high growth of over 33% on a compounded annual growth basis in the personal loan segments over the past five years for NBFCs, as against a 15% growth in the overall assets under management was among the reasons which RBI increased the risk weights on unsecured loans late last year. Bajaj also requested a liquidity line at par with a bank which can help an NBFC in situations of stress and also harmonisation in regulations for entities which might be overseen by multiple watchdogs like RBI, IRDAI and SEBI.
(With PTI inputs)
(Edited by : Ajay Vaishnav)
