Blog Detail

The Reserve Bank of India (RBI) has taken a keen interest in Non-Banking Financial Corporations (NBFCs) in recent times. If one looks at the official website, the most number of announcements and declarations have come in 2017 and 2018. The major announcements include the Ombudsman directive, the P2P lending platform guidelines and the categorization of NBFCs. Each of these regulations have their specific features which will have their unique impact on the lending sector. The financial analysts at Prest Loans (www.prestloans.com) present an analysis of the impact of these guidelines covered with where NBFCs and the RBI might be headed.

We should start with a brief history of how NBFCs have been regulated. India has always had an active undercurrent of lending activity that was carried out outside the scope of traditional banking. NBFCs sought to regularize that trade and give it more structure and organization while still being nimble and swift when compared with their banking counterparts. The growing credit demand of the nation and the growth of information technology both fueled the growth of NBFCs, who used the latter to build the required expertise to quench the former. Hence, the amendment of the Reserve Bank of India Act, 1934 (into RBI Act, 1997) captured greater detail about NBFCs¹. On May 30, 1998, SP Talwar introduced the regulatory framework for NBFCs in a landmark seminar² where the role of NBFCs in performing “financial intermediation” was mentioned. Regulations continued to appear (Banking developers and perspectives³ and the extremely important, Non-Banking Financial Companies, 2003⁴ and many more).

The way RBI has been looking at NBFCs has also changed over time. The initial classification was very rudimentary⁴ where NBFCs, “Nidhi companies” and chit-fund companies were recognized. Today, the classification includes about a dozen clearly defined norms. An Asset Finance Company (AFC) is a kind of NBFC which lends to enable economic activity for companies dealing with automobiles, tractors, lathes etc. An Investment Company deals with the acquisition of securities. A Gold Loan NBFC company which majorly provides loan against gold as security, similarly Micro Finance NBFCs (MFIs) focused on loans to small help groups. A Loan Company (LC) helps in providing loans for any other activity other than the ones carried out by AFCs. This show the RBI has built a much better clarity of how to look at and identify NBFCS. Further, NBFCs have been categorized based on asset size as well.

 RBI has continued its work onto the present day on the NBFC sector. The most recent one causing waves is the one which says that the RBI will appoint an Ombudsman⁵ to be the point of contact for complaints. These complaints range from non-payment of interest to levying of hidden charges. They also include the provision of the failure to ensure transparency in the lending process (it will be interesting to see how this transparency is actually interpreted in practice). The Ombudsman directive also makes the previous RBI guidelines even more important as one of the complaint clauses is also the failure to adhere to the RBI guidelines! This puts a lot of pressure on existing NBFCs to appoint Nodal Officers (the regulation included that as well) who will liaise with the Ombudsman to resolve the complaint. This also means that the activities of the NBFC is under much greater scrutiny than ever before.

One of the other epoch-making regulation is about P2P Lending Platforms⁶. The regulation specified that the business of such a platform be “primarily Information Technology (IT) driven” before going to specify regulations about security and business continuity. This was a very modern outlook conveyed by the RBI which forever cemented the importance of technology for NBFCs. The regulation also stipulated the funds transfer mechanism through escrow account mechanisms. It also highlighted reporting requirements and reinforced the need for nodal officers to report to the Ombudsman. Hence these kind of regulations proved that the RBI was indeed taking NBFCs very seriously and that they would consider them to be instrumental for the economic growth of the nation and financial inclusion.

The future for RBI and NBFCs

NBFCs are going to grow to tap into unreached territory and business areas. NBFCs like Prest Loans (www.prestloans.com) also expanding their business borders to stay innovative in the new financial age. There is still a lot of unmet credit demand which banks are trying to fulfill by merging or partnering with smaller technology companies to float more interesting offerings. The RBI is going to monitor the NBFC space even more closely. As a future trend, it will be seen that more and more larger corporations will have their NBFC offshoot that will even operate as an independent firm (to be free of any bureaucratic hurdles which will otherwise defeat the purpose of having a NBFC). It will be interesting then, to see, the kind of regulations that will come into being to better govern such spaces.

Sources:

1: https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=18530

2: https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=3

3: https://rbi.org.in/scripts/PublicationsView.aspx?Id=3284

4: https://rbi.org.in/scripts/PublicationsView.aspx?Id=5796

5: https://rbi.org.in/Scripts/BS_NBFCNotificationView.aspx?Id=11221

6: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11137

https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=6857