Context:
The Reserve Bank of India (RBI) has intensified its scrutiny of Non-Banking Financial Companies (NBFCs) and gold loan lenders, urging them to adhere strictly to regulatory norms during lending practices. This move aims to bolster regulatory control and ensure compliance within the sector. The RBI’s recent actions include banning IIFL Finance from issuing fresh gold loans due to violations of lending norms, highlighting the central bank’s commitment to enforcing regulations and maintaining financial stability.
Relevance:
GS III: Indian Economy
Dimensions of the Article:
- Increased RBI Scrutiny of NBFCs
- Impact of RBI Scrutiny on NBFCs
- What are NBFCs?
Increased RBI Scrutiny of NBFCs
- The Reserve Bank of India (RBI) has intensified its examination of Non-Banking Financial Companies (NBFCs) following the discovery of regulatory breaches among certain NBFCs.
- In March, IIFL Finance faced a ban from the RBI on issuing new gold loans due to non-compliance with lending regulations.
RBI’s Regulations on Gold Loans
- Loan-to-Value Ratio: Lenders must adhere to a maximum loan-to-value ratio of 75%, ensuring that the loan amount does not exceed 75% of the value of the gold pledged as collateral.
- Cash Disbursement Limit: A maximum of ₹20,000 in cash can be disbursed to borrowers upon loan approval, with the remaining amount deposited directly into their bank accounts.
- Auction Procedure: Lenders must conduct auctions of defaulted gold assets in a fair and transparent manner, accessible to borrowers.
Rationale for Strengthening Regulations
- Rapid Growth in Gold Loan Portfolios: NBFCs have experienced a substantial increase in their gold loan portfolios, surging from approximately ₹35,000 crore in FY 2020 to about ₹1,31,000 crore by FY 2023.
- Concerns of Regulatory Violations: The RBI may be apprehensive that the aggressive expansion of gold loans by NBFCs is accompanied by widespread non-compliance with lending regulations.
- Potential Systemic Risks: As the gold loan industry expands rapidly, systemic risks may emerge if lending norms are not rigorously enforced.
Impact of RBI Scrutiny on NBFCs
- Growth and Profitability Concerns: NBFCs anticipate that the RBI’s scrutiny of their lending practices will impede their growth trajectory and affect profitability.
- Reduced Attractiveness of Gold Loans: The RBI’s directive limiting cash disbursements to ₹20,000 upon loan approval is expected to diminish the appeal of NBFC gold loans.
- Revised Lending Strategies: Many NBFCs may need to adopt less aggressive lending approaches as the RBI rigorously enforces loan-to-value regulations.
- Increased Operational Costs: Enhanced transparency in the auction process, aimed at making it more accessible to borrowers, could escalate operational expenses for NBFCs, potentially leading to higher borrowing rates.
- Long-term Sustainability: Despite short-term challenges, the RBI contends that adherence to lending norms will foster a more sustainable gold loan industry, mitigating systemic risks over time.
What are NBFCs?
- An NBFC, registered under the Companies Act, 1956, engages in various financial activities, including loans, securities investments, leasing, and insurance.
- Excludes institutions primarily involved in agriculture, industry, goods trading, services, or immovable property trading.
Criteria for Registration:
- A company is registered as an NBFC by the RBI if over 50% of its assets are financial assets and more than 50% of its income is derived from these financial assets.
Regulatory Authority:
- The Reserve Bank, under the RBI Act 1934, has the authority to register, lay down policy, issue directions, inspect, regulate, supervise, and exercise surveillance over NBFCs.
Differences from Banks:
- NBFCs cannot accept demand deposits from the public, unlike banks.
- NBFCs are not part of the payment and settlement system, and they cannot issue cheques like banks.
- Deposit insurance facilities, available to bank depositors, are not extended to NBFC depositors.
Funding:
- NBFCs primarily finance operations through a combination of market borrowing and bank loans.
Financial Activities & Services Offered by NBFCs
- Diverse Financial Services: NBFCs provide a wide range of financial products and services, including loans, credit facilities, asset financing, leasing, hire-purchase, and investment in securities.
- Credit Provision to Underserved Sectors: NBFCs play a vital role in extending credit to various sectors, particularly underserved markets and small-to-medium enterprises (SMEs) that may face challenges accessing traditional banking services.
- Investment Portfolio Management: NBFCs engage in investment activities such as acquiring shares, stocks, bonds, debentures, and government securities, along with managing portfolios of stocks and shares.
- Specialized Market Focus: Many NBFCs concentrate on niche markets and specific financial products, such as microfinance, infrastructure finance, housing finance, and insurance services.
- Regulatory Oversight: In India, NBFCs operate under the regulatory framework established by the Reserve Bank of India (RBI), which outlines guidelines covering capital adequacy, risk management, and governance practices.
- Complementary Role to Banks: NBFCs complement traditional banks by catering to segments underserved by banks, thereby contributing to the expansion of financial markets and enhancing financial inclusion efforts.
-Source: The Hindu
