Sign Up

RBI calls for collaboration, innovation, and risk management as NBFCs take on bigger infrastructure Role

RBI calls for collaboration, innovation, and risk management as NBFCs take on bigger infrastructure Role

The Reserve Bank of India (RBI) highlighted its commitment to fostering a robust and innovative NBFC (Non-Banking Financial Company) sector while ensuring financial stability. “RBI's role encompasses regulation, supervision, consumer protection, and enforcement. The developmental role has always been there, and we strive to streamline the regulatory framework to address risks while enabling the development and growth of these entities and fintech,” said Shri R. Lakshmi Kanth Rao, Executive Director, Reserve Bank of India (RBI) while addressing at the Assocham 10th National Summit on NBFCs & Infrastructure Financing held in Mumbai today.

The RBI Executive Director stressed the importance of compliance and customer protection for NBFCs. “NBFCs are a critical part of the financial system, contributing to diversification and innovation. However, their growing size necessitates a shift from pure activity-based regulation to a framework that considers both activity and scale to effectively manage risk. There could be lesser importance given to compliance due to lighter regulations in the past. However, with increased scale, NBFCs are required to meet stricter compliance requirements. They need to diagnose their compliance systems and adhere to the guidelines issued by RBI.”

“The risks associated with infrastructure financing are well-known. For it to thrive, collaboration among all stakeholders, including banks, NBFCs, and the government, is essential,” said Rao while emphasizing the significance of collaboration between the RBI and NBFCs, “We have called for applications for Self-Regulatory Organizations (SROs). This is a developmental aspect where NBFCs can play a strong role in regulating themselves. The sector itself needs to have strong regulatory standards to ensure there are no regulatory gaps.”

"We frequently issue discussion papers on major developmental initiatives, inviting stakeholder feedback to ensure well-rounded regulatory frameworks. The idea of a level playing field between banks and NBFCs is complex, given their distinct roles and regulatory requirements. Banks and NBFCs differ fundamentally in their operations and risk profiles, necessitating different regulatory approaches. The NBFC sector is significant, accounting for around 30% of the total bank credit in India and plays a crucial role in credit intermediation. Their contributions to financial diversification and stability are invaluable, yet their interconnectedness with banks also poses systemic risks. A balanced regulatory approach is essential to support NBFC growth while ensuring overall financial stability" concluded Shri Rao.

Calling for collaboration and innovation among traditional banks, NBFCs, and the capital markets to strengthen infrastructure financing in India, SBI Managing Director Shri Ashwini Kumar Tewari in his address said, "It is indeed India's time. But as we all know, India is getting built every single day, and may be for the next several years India will continue to be built. So therefore, if that be the case, then infrastructure finance is a very, very key piece of this whole story."  

"There's a long way to go for NBFCs in infrastructure financing. While regulations have rightly evolved and tightened recently due to past incidents, NBFCs have the potential to significantly contribute to this sector," he added, "The growing dependence of NBFCs on banks for funding increases risk for the entire banking system. The bank lending to NBFC has gone up significantly. It used to be around 20%, but in the last round, I think December or February numbers, if I recall correctly, it's closer to 50%. Now, if 50% of the NBFC book is financed by banks, then we have to take the risk. And therefore, the regulations which apply to banks possibly also need to be applied to NBFCs to ensure a more balanced and secure financial landscape."

Looking towards the future, the SBI MD stressed the importance of developing a robust bond market, stating, "The bond market remains an underutilized avenue for long-term infrastructure financing. Partial credit enhancement mechanisms can play a vital role in attracting investors by mitigating risk and encouraging participation in these essential projects."

To provide alternate funding channels for smaller NBFCs, Shri Sudatta Mandal, DMD, SIDBI, while speaking at the event said, "We all would agree that there is always scope for changes for the betterment of NBFC sector and to make it robust. There is a case for positive regulatory intervention to support the growth of the sector while one area of focus could be strengthening the liability side of balance sheets, the other could be mechanisms to boost lender confidence and safety. We have witnessed increasing dependence of NBFCs on bank warrants as a major source of funds which has become a cause of concern for the regulator. While the corporate bond market issuances in the recent past have seen large participation from the NBFC space the same is tilted in favour of the larger and highly rated NBFCs with the smaller ones generally kept out. So, this sector has no accessibility to CASA and faces non availability of depositor credit insurance.”

“Considering the role played by MSMEs in enhancing MSME credit delivery in a growing economy there is a need for positive regulatory interventions for enhancing alternate funding channels for the NBFC sector more particularly the smaller NBFCs,” he further added.

Speaking on the need of large capital in infrastructure financing space, Shri Virender Pankaj, CEO, Aseem Infrastructure Finance Ltd, said, "For a country like India where capital formation and whatever savings we have is not going to be enough for this which means we need very large amount of private capital, very large amount of global capital to come in. Global capital is inversely proportional to the risk perception so lesser are the risk associated or what is called India risk in global markets. Lesser is the India risk more is the capital available because there is no dearth of capital available in the world, in fact it is the other way round, there are fewer places to invest but risk is very important.

So, we reduce the risk, now in infrastructure actually number of players or number of stakeholders as a class is very few so it is not too difficult or complicated for us a nation to collectively reduce the risk in this space and lot of risks have gone down if one were to look at the infrastructure financing."

Earlier, Shri Shachindra Nath Chairman, ASSOCHAM National Council for NBFC & Infrastructure Financing and VC & MD, UGRO Capital Ltd has given the welcome address. Shri Rajkiran Rai Chairman, ASSOCHAM National Council for Banking & MD, National Bank for Financing Infrastructure and Development (NaBFID) in his theme speech highlighted the vital aspect and role of NBFCs, emphasizing how regulation ensures a level playing field, protects consumers, and promotes long-term stability. An Assocham-ICRA joint Knowledge report titled NBFCs - Regulators as Enablers to Financial Lending Companies was also unveiled during the event.

Day Image Day Image