Mumbai: The Reserve Financial institution of India’s current proposal for tighter regulatory framework for non-banking monetary firms could strengthen their stability sheets however won’t deal with their funding and liquidity points, says a report. Final week, RBI launched a dialogue paper which proposed a scale-based regulatory strategy linked to the systemic danger contribution of shadow lenders.
In a report on Monday, Moody’s Buyers Service stated the proposal will commit the biggest 25-30 NBFCs to laws much like banks relating to capital, credit score focus and governance.
“If applied, the laws would consequence within the firms changing into extra resilient to credit score shocks. Nevertheless, the proposals don’t deal with NBFC’s funding and liquidity, the important thing credit score weak spot of the sector,” Moody’s stated.
The proposed new laws would lead to largely harmonised guidelines between banks and NBFCs on capital and leverage, which would cut back the regulatory arbitrage alternatives for NBFCs towards the banks of their lending selections, it stated.
Nevertheless, adjustments are proposed to the NBFCs’ present lighter liquidity guidelines, the report stated.
Banks are topic to strict laws on sustaining a minimal money reserve ratio and statutory liquidity reserve, which aren’t imposed on NBFCs, it stated.
“This implies the proposal doesn’t deal with the important thing weak spot of the NBFCs and the sector will proceed to pose dangers to banks’ asset high quality as a result of banks are the biggest lenders to the NBFCs,” the report stated.
The paper has proposed the regulatory framework of NBFCs primarily based on a four-layered structure- base layer (NBFC-BL), center layer (NBFC-ML), higher layer (NBFC-UL) and prime layer.
“If applied, the biggest 25-30 NBFCs will probably be categorised as NBFC-UL and might want to preserve a minimal widespread fairness tier 1 (CET1) ratio of 9 per cent in contrast with 8 per cent for banks,” Moody’s stated.
The NBFCs will want board-approved insurance policies for focus in riskier sectors similar to actual property, which has been a supply of asset high quality issues for NBFCs, it stated.
Moody’s expects most rated NBFCs to be categorised as NBFC-UL. The brand new norms don’t present a lot incentives for NBFCs to transform into banks, which the regulator has envisaged by way of the proposed adjustments to financial institution possession laws in November 2020, the report stated.
The banking regulator is proposing to initially preserve the NBFC-top layer empty, however will transfer firms into this class if it sees elevated credit score danger in these firms, it stated.
“These NBFCs will probably be topic to tighter supervision much like the immediate corrective motion framework for banks,” the report stated.
