NBFCs should prioritise compliance, risk, and liquidity :RBI

Non-banking finance companies (NBFCs) should prioritise compliance, risk management, liquidity management, and customer protection, according to R. Lakshmi Kanth Rao, Executive Director of the Reserve Bank of India (RBI). Speaking at an Assocham conference, Rao emphasised the regulatory differences between NBFCs and banks, highlighting that NBFCs should not expect to be treated the same as banks.

Rao noted that while NBFCs contribute approximately 30% to the total bank credit in India and are increasingly interconnected with banks, a level playing field with banks is challenging. He pointed out that applying banking regulations to NBFCs might be unfavourable, citing the disparity in penalties between banks and NBFCs as an example.

He stressed the importance of robust compliance systems for NBFCs, noting that inadequate compliance can lead to significant business problems. Rao also highlighted the need for improved customer protection, particularly in terms of transparency, pricing, and fees. Additionally, he urged NBFCs to manage liquidity risk and diversify their funding sources, noting the critical role of cybersecurity as NBFCs scale up their use of technology.

Ashwini Kumar Tewari, Managing Director of Corporate Banking and Subsidiaries at the State Bank of India (SBI), also spoke at the conference. He raised concerns about NBFCs having multiple banks as lenders, arguing that this complicates credit control and follow-up mechanisms. Tewari suggested the need for a consortium arrangement where a few banks collectively manage and assess large credit portfolios, ensuring better oversight and control. He underscored the importance of resource diversification given the significant linkages between banks and NBFCs through direct lending, co-lending, and portfolio purchases.