Financial Services Risk Insights Vol VI

The Volume VI of Financial Services Risk Insights deep dives in to the discussion paper released by the Reserve Bank of India on regulatory framework for non-banking financing companies (NBFCs). The paper provides the background of regulatory arbitrage between the banks and NBFCs and why it doesn’t exist anymore. The premise for the regulatory arbitrage was the lower scale of operations of NBFCs vis-à-vis banks.

The paper also provides some very useful statistics to demonstrate how the NBFCs have grown significantly over the years. This will help understand the level of inter-connectedness that NBFCs have with the banks today, which poses a very high level of systemic risk. This is why the RBI has applied the principle of proportionality to come out with a scale-based regulatory framework.

While a scale-based regulatory framework has been suggested as per the discussion paper, it is also important that the RBI considers the implications on its supervisory bandwidth. While supervisory tech is something that the RBI is leveraging and exploring further, it must start partnering with external professionals for augmenting its bandwidth. Regulation without adequate supervision renders a regulation ineffective and augmenting supervisory bandwidth is an important attribute to be addressed. Some of the leading regulators in the world have chosen this path and the RBI may also consider it.