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The Reserve Bank of India (RBI) persistently examines the financial sector and takes necessary actions to stabilize the system. Henceforth, RBI has recently extended NBFC supervision to cover auditors, banks, and rating companies. The reason to undertake such a decision was to prevent any defaulter cases in succeeding years and also to enlarge financial stability.
A Synopsis of the whole story
Here are the highlights of the RBI’s outlook on the new guidelines:
- RBI says that “apart from reinforcing the existing four pillars of supervision encompassing market intelligence, on-site examination, off-site surveillance, and statutory auditor, a fifth pillar will further come in the forefront.”
- Furthermore, RBI defines the fifth pillar as the periodic interaction with stakeholders like credit rating agencies, statutory auditors, and banks that have massive exposure to NBFCs. So it shall get institutionalized as part of the supervisory process to monitor emerging build-up risks and take pre-emptive actions there and then.
- The primary motive behind raising NBFC supervision is to strengthen the role of NBFCs, rating companies and auditors. Also, it will ensure that no defaulters carry any illicit activities and such financial institution functions smoothly.
- Reportedly, there are 276 deposit-taking NBFCs with asset size of about more than Rs 500 crore which faces greater on-site and off-site monitoring. Besides, together they are accountable for 85% of the sector’s assets.
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RBI promotes a holistic approach for adequate NBFC Supervision
Considering the growing complexities and interconnection of banks along with the NBFCs, RBI has initiated some actions to revamp units for efficient supervision. So let’s have a look at RBI’s strategy:
- Previously, RBI proposes to integrate certain functions of supervisory departments to perceive the systemic linkage between NBFCs and banks and their interconnectedness.
- Thus, it enables a holistic understanding of linkages, systemic risks, and contagion across financial entities.
- Further, RBI decides to bring all Government-owned, non-deposit taking NBFCs under off-site surveillance and the regulator’s on-site inspection framework.
- Consequently, it cancelled the registrations of 1,604 non-banks for non-fulfillment of the prescribed criterion of the minimum NOF requirement of Rs 2 crore to eliminate non compliant or weak NBFCs.
Final Impact of RBI’s Amendments on NBFC
The Finance Bill 2019 indicates the amendments in the RBI Act, 1934, which confers the powers on the RBI to support governance of NBFCs. Hence, “RBI’s measures will reshape the investors’ apprehensions along with underpinning the aiding NBFCs to perform better. Moreover, the RBI will continue to maintain a consistent vigil over NBFC’s functions & thereby take necessary steps to secure the overall financial realm of India.