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Thursday, January 28, 2021

Use Market for Oversight of NBFCs (The Economic Times)

Quick takes, analyses and macro-level views on all contemporary economic, financial and political events.


An RBI discussion paper on a revised regulatory framework for non-banking financial companies (NBFCs) has called for staggered, scale-based approach. The paper pitches for the principle of proportionality in regulatory oversight, commensurate with systemic risk perceptions, and taking into account interconnectedness, leverage levels, substitutability and the like, so as to make judicious use of ‘supervisory resources’.


It seems very much a work in progress. The information dissemination and processing ability of the market is something that has to be marshalled for oversight and self-correction, and an easy way to achieve this is by creation of a vibrant market for corporate debt. The suggested risk perception looks odd. The paper visualises a pyramidical regulatory framework.


NBFCs requiring the least regulatory intervention, characterised as non-systemically important, are placed, unexceptionably, at the base. However, NBFCs in housing finance or infrastructure finance are supposed to be placed in the Middle Layer, which may not be prudential or even efficient. The fact is that the failure of high-profile NBFCs like IL&FS, which quite spectacularly defaulted on its highly rated bonds a couple of years ago, does corroborate the need for an active and vibrant corporate bond market.


In the Upper Layer of the proposed regulatory pyramid structure, the 10 largest NBFCs are to be placed for supervisory purposes, as also the next 50. And the Top Layer is to be empty, reserved for entities that require prompt correction in their governance practices and operational parameters.


The central bank surely needs to boost its supervisory capacity across the board rather than mechanically follow an overtly rule-based approach that can, well, fail. After all, NBFCs perform a vital role in intermediation and provide credit to segments and niche markets unserviced by banks. Large-scale use of data analytics, to scan financial flows among banks and NBFCs for assorted patterns, must supplement normal audit and supervision. Fintech has a big role to play.

Courtesy - The Economic Times.

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इस वेबसाइट को जारी रखने में यथायोग्य मदद करें -

-Rajeev Kumar (Editor-in-chief, Sampadkiya.com)

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