Asserting that there was a must recalibrate laws for non-banking monetary firms (NBFCs), Reserve Bank Deputy Governor M. Rajeshwar Rao on Friday mentioned NBFCs with vital externalities and which contribute considerably to systemic dangers have to be recognized and subjected to the next diploma of regulation.
“One can also argue that the design of prudential regulatory framework for such NBFCs can be comparable with banks so that beyond a point of criticality to systemic risks, such NBFCs should have incentives either to convert into a commercial bank or scale down their network externalities within the financial system,” he mentioned. This would make the monetary sector sound and resilient whereas permitting a majority of NBFCs to proceed beneath the regulation-light construction, Mr. Rao mentioned at an Assocham convention.
Observing that NBFCs at the moment loved an amazing diploma of regulatory arbitrage vis-a-vis banks, he mentioned these entities might contribute to a build-up of systemic dangers due to such arbitrage and therefore there was a must recalibrate the laws. “We could perhaps consider a graded regulatory framework for NBFCs, calibrated in relation to their contribution to systemic significance,” he mentioned.
Mr. Rao mentioned the share of NBFC-MFIs (microfinance establishments) within the total microfinance sector had come right down to slightly greater than 30% as a number of giant MFIs had transformed into Small Finance Banks.
“There is a need to re-prioritise regulatory tools in the microfinance sector so that our regulations are activity-based rather than entity-based,” he mentioned.