RBI Red Flag for NBFCs: Shadow Banks Face Tougher Supervision
The Reserve Bank of India (RBI) intends to strengthen the supervisory architecture of Non-Banking Financial Companies (NBFCs) given the systemic risks arising from their size and interconnectedness.
“The higher risk appetite of NBFCs has…contributed over time to their size, complexity and interconnectedness, rendering some of the systemically important entities a potential threat to financial stability,” said the RBI in its annual report for FY22. “NBFC’s balance sheet has expanded in 2021-22, but the quality of assets in the sector has deteriorated,” the report observes.
Given the large share of funding absorbed by NBFCs at the system level, continued attention to their financial health is warranted from a financial stability perspective, the report adds.
“NBFCs and Urban Cooperative Banks (UCBs) will need to be aware of vulnerabilities, wherever they exist, in their balance sheets and ensure sound asset-liability management, in addition to improving the quality of their credit portfolios,” says the annual report.
The oversight architecture review will follow a year of regulatory overhaul for NBFCs.
Through several circulars in FY22, the RBI detailed the new ladder-based regulatory framework for non-bank lenders and issued new guidelines for Microfinance Institutions (MFIs).
In the current year, the regulator plans to revise the oversight framework and reporting format of NBFCs under the Indian Accounting Standards (Ind-AS) based on the relevant regulatory guidelines. The RBI will also make changes to the sector assessment in the context of the ladder-based regulatory framework and will roll out Key Risk Indicators (KRIs) for NBFCs to assess their cybersecurity risk profile. An information technology (IT) review for some NBFCs is also planned.
The revised supervision framework will include the implementation of a risk-based approach for the KYC supervision of certain NBFCs and guidelines on the compliance function. A unified fraud reporting system is envisaged for all supervised entities, which will also be required to undertake measures to strengthen cybersecurity.
The RBI intends to further strengthen the audit mechanisms in NBFCs and also to intensify the operations of the College of Supervisors (CoS) for capacity development and upskilling of its supervisory staff.