RBI tightening oversight of big NBFCs to avoid systemic spillovers: Moody's

Reserve Bank of India. (File Photo)

India's risk-based internal audit requirement for non-banking finance companies is credit positive, Moodys Investors Service said.

The Reserve Bank of India (RBI) issued guidelines for the country's largest non-banking finance companies (NBFCs) to implement a risk-based internal audit framework, in line with banks. The framework requires an NBFC's internal audit function to assess risks independently of its existing risk-management functions.

The requirement is credit positive because it adds another layer of risk monitoring and improves the companies' resilience to unexpected shocks, Moody's said.

The guidelines will apply to all deposit-taking NBFCs or NBFCs with assets of more than Rs 500 billion as of March 31, 2022. The framework's application to the largest NBFCs reflects the RBI's ongoing efforts to strengthen and harmonise regulatory norms between NBFCs and banks. The NBFC sector has been increasingly important to credit growth in India.

NBFCs' total balance sheet more than doubled to Rs 49 trillion in 2020 from around Rs 20 trillion in 2015. At the same time, banks' exposures to NBFCs have also increased, and according to RBI data, 8.5% of gross bank credit was to NBFCs as of December 2020, compared with 4.8% in December 2016. Banks have traditionally been subject to stricter regulations and risk controls than NBFCs, creating regulatory arbitrage for NBFCs, even though they provide similar financial services. As a result, the RBI is gradually tightening supervision of the largest NBFCs to avoid systemic spillovers.



Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel