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NBFCs to come under tighter RBI scrutiny

NBFCs to come under tighter RBI scrutiny
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Mumbai: With both systemic importance of NBFCs as also their failures increasing, the Reserve Bank on Friday announced a slew of measures to keep them resilient by reining them in by improving their governance standards and also fool-proofing their risk management and internal controls.

Announcing a set of measures to this effect at the monetary policy review, Governor Shaktikanta Das said the first tightening measure is on the regulatory regime for non-banking financial companies (NBFCs), which currently is built on the principle of proportionality.

This regulatory regime based on the principle of proportionality warrants a review. It is felt that a scale-based regulatory approach linked to the systemic risk contribution of NBFCs could be the way forward, Das said. The governor also said as part of the stakeholder consultation process, a discussion paper on this will be issued before January 15, 2021, for public comments. Das called upon the financial sector entities to give the highest priority to quality of governance, risk management and internal controls as these are the first line of defence in matters relating to financial sector stability.

The governor said a review of the way NBFCs are functioning is needed because of their growing significance and rising interlinkages with other segments in the financial system.

This has made it imperative to enhance the resilience of NBFCs by putting in place a transparent criteria according to a matrix of parameters for declaring dividends by different categories of NBFCs , the regulator said.

RBI said large NBFCs and urban cooperative banks(UCBs) will have to submit a risk-based internal audit and a harmonised guidelines for appointing statutory auditors for commercial banks, UCBs and NBFCs with a view to improve the quality of financial reporting.

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