NON-BANKING FINANCIAL COMPANIES, whether or not accepting public deposits, are a motley lot not so easily amenable to regulation and supervision, given their heteromorphic characteristics. But their USP is this diversity that gives them the flexibility to provide tailor-made, niche services relatively faster than banks and financial institutions. For the Reserve Bank of India, the regulatory challenge vis-à-vis NBFCs, as the central bank said in one of its recent reports, is "to design a supervisory framework that is able to ensure financial stability without dampening the very spirit of manoeuvrability and innovativeness that sustains the sector."

By its own admission, the RBI now recognises that "increased competition in the financial sector and strengthening of the regulatory requirements have resulted in a major consolidation in the NBFC sector in recent times." And the number of cases of RBI-registered NBFCs not complying with the regulatory stipulations is definitely on the decline. What the sector earlier lacked was a unified face, representative of a group of responsible financial intermediaries, which could engage the monetary authority seriously on various macro and micro issues affecting the sector directly or indirectly. The RBI has now succeeded in goading the representative bodies of the serious players to come under a common platform a kind of self-regulatory organisation, aptly labelled Finance Industry Development Council (FIDC). The move is predicated on the assumption that "ethically strong members will enforce discipline on others". As some within the NBFC sector say, when it comes to self-interest, you need to put a "fox in charge of the hen house". And, this is perceived as the biggest challenge before the FIDC.

The RBI must recognise the contribution made by the NBFCs in providing need-based credit to individuals and corporates. Indeed it can do more to bring the NBFCs on to the mainstream of the financial sector, by setting up a re-financing mechanism for the sector, somewhat like the National Housing Bank for housing finance companies, and offering the back-up of the Debt Recovery Tribunal for recovery of dues. Interest groups argue that the on-going deregulation in the financial sector must continue, but in such a manner that all types of institutions are strengthened and the overall financial stability of the system is safeguarded. There is a growing perception among various stakeholders that the RBI is obsessed with depositor protection. This may be because, traditionally, the regulation of the NBFCs was confined to their deposit-taking activities.

The RBI feels that the financial liberalisation has exposed the FIs to a wide range of market risks, and that this necessitates a continuous restructuring of the regulatory framework. But, then, the apex bank has now reduced the number of NBFCs to a manageable universe and clear cut norms on capital adequacy, income recognition, asset classification, credit rating and exposure norms are in place. To help the sector adapt itself to the changing financial landscape, the RBI now needs to tango more effectively with the NBFCs with the FIDC watching the steps.

(This article was published in the Business Line print edition dated January 22, 2005)
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