The Reserve Bank of India (RBI) intends to tighten the supervisory architecture for non-banking financial companies (NBFCs) in view of the systemic risks emerging from their size and interconnectedness.
“Higher risk appetite of NBFCs has…contributed over time to their size, complexity, and interconnectedness, thus, making some of the entities systemically significant that pose potential threat to financial stability,” the RBI said in its annual report for FY22. “The balance sheet of NBFCs expanded in 2021-22, but asset quality in the sector deteriorated,” the report observed.
Considering the significant share of funding absorbed by NBFCs at the system level, continued attention to their financial health is warranted from the viewpoint of financial stability, the report added.
“NBFCs and urban cooperative banks (UCBs) will have to be mindful of frailties, wherever they exist, in their balance sheets and ensure robust asset-liability management, apart from improving the quality of their credit portfolios,” the annual report stated.
The review of the supervisory architecture will follow a year of regulatory revamp for NBFCs.
Through multiple circulars in FY22, the RBI has detailed the new scale-based regulatory framework for non-bank lenders and issued fresh guidelines for microfinance institutions (MFIs).
In the current year, the regulator plans to review the supervisory framework and the return format for NBFCs under the Indian Accounting Standards (Ind-AS) based on the regulatory guidance in the matter. The RBI will also make changes in sectoral assessment in the context of the scale-based regulatory framework and roll out key risk indicators (KRIs) for NBFCs to assess their cybersecurity risk profile. An information technology (IT) examination for select NBFCs is also on the cards.
The revised supervisory framework will include the implementation of a risk-based approach for KYC supervision of select NBFCs and guidelines on the compliance function. A unified fraud reporting system is being envisaged for all supervised entities, who will also be made to undertake cyber security enhancement measures.
The RBI intends to further strengthen the audit mechanisms at NBFCs and also to scale up operations of the college of supervisors (CoS) for capacity development and skill enhancement of its supervisory staff.