According to Care Ratings, the recent RBI measures to regulate NBFCs more will impact profitability and asset quality in the short term, though they will bring in more transparency and improve NBFCs ability to withstand asset quality shocks in the long run
Earlier this week, the Reserve Bank of India (RBI) released the ‘Revised Regulatory Framework for NBFC’ in line with its desire to strengthen financial system and reduce the regulatory arbitrage between banks and non-banking finance companies (NBFCs).
"In the short term, these measures will impact the profitability and asset quality of the NBFCs; however, these measures will bring in more transparency and improve NBFCs ability to withstand asset quality shocks in the long run," says Care Ratings in a research report.
It said, "The new regulatory framework will lead to strengthening of NBFCs balance sheet, with increase in loss absorbing Tier I capital requirement for systemically important NBFCs and deposit accepting NBFCs and restricting leverage for smaller NBFCs in line with higher core Tier I requirement for banks under Basel III guidelines. On NPA recognition norms and provisioning on standard assets also, banks and NBFC will be at par. The increase in disclosure requirement and corporate governance norms will improve the transparency and increase the accountability of management and the board and improve the investor awareness."
Here are the key changes and its likely impact on NBFCs...
Over the years, the NBFC sector has become systemically important with rise in assets under management from around 11% of bank assets in 2009 to 13% of bank assets in 2013. The rising importance of NBFCs and their growing interconnectedness with banks as well as issues like risk management framework for the sector, regulatory gaps and arbitrages, compliance and governance issues have led to the RBI making certain regulatory changes.
RBI had set up various Working Groups to study these dimensions of the sector and the important recommendations of the Usha Thorat Committee (August 2011) and Nachiket Mor Committee (January 2014) have been drawn upon in the revised regulatory framework.
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