Will not hesitate to take steps to maintain financial stability: Das

Pune: Concerned over stress in the NBFC sector, RBI Governor Shaktikanta Das said there is a need to have a fresh look at the regulation as well as supervision, and the central bank will come out with guidelines on liquidity risk management framework shortly.

Addressing 15th Annual Convocation of Post Graduate Diploma in Management at National Institute of Bank Management (NIBM), he said, fine tuning and improving supervision and regulation is a continuous exercise.

In this direction, he said, the RBI has reduced the period of the NBFC supervision to 12 months from 18 months earlier. He also expressed hope that the Board of Directors of non-banking financial companies (NBFCs) to act diligently and take necessary action based on Reserve Bank’s supervision reports.

Further, Das said, “Our objective is to harmonise the liquidity norms between banks and NBFCs, taking into account the unique business model of the NBFCs vis-a-vis banks. In this context, the final guidelines on the liquidity risk management framework, which we have proposed recently, will be issued shortly.”

The debt default by a large NBFC in mid-2018 highlighted the vulnerability and need for strengthening regulatory vigil on the sector in general and on the asset liability management (ALM) framework in particular, he noted.

In this context, the Reserve Bank of India (RBI) last month issued a draft circular on liquidity risk management framework for non-banking financial companies and core investment companies.

Observing that the conventional approach to regulation and supervision of NBFCs has been light-touch, Das said, “We will not hesitate to take any required steps to maintain financial stability in the short, medium and long-term.”

With a view to strengthen the sector, maintain stability and avoid regulatory arbitrage, he said, the RBI has been proactively taking necessary regulatory and supervisory steps, keeping in mind the requirements of the time.

“In the light of recent developments, there is a case for having a fresh look at their regulation and supervision. It is our endeavour to have an optimal level of regulation and supervision so that the NBFC sector is financially resilient and robust. At the same time, NBFCs should be enabled to operate as well-functioning entities with necessary capacity to reach wider sections of population. The Reserve Bank will continue to monitor the activity and performance of this sector with a focus on major entities and their inter-linkages with other sectors,” the governor said.

It is to be noted that many large NBFCs came under severe liquidity pressure, compelling them to bring down their reliance on commercial papers following series of default by group companies of IL&FS beginning September last year.

Ever since the IL&FS crisis erupted, banks have been averse to lending to the sector, which has put them in a tight spot. There are concerns that NBFCs may run out of money, which will lead to defaults. According to estimates, about Rs 1 lakh crore of commercial papers (CPs) raised by NBFCs from investors will come up for redemption in the next three months.