The Reserve Bank of India (RBI) is expected to suggest stricter regulatory norms for shadow banks in an attempt to solidify solvency and sustainability of a sector that has been under stress since few years, according to the Economic Times.
Stricter rules for this sector are proposed after Infrastructure Leasing and Financial Services, the largest non-banking financial company (NBFC), went bankrupt in 2018. Along with this, Dewan Housing Finance Corp and Altico Capital failed to repay their debts in 2019.
RBI has formed its proposals in a discussion paper for the upcoming week and recommend that larger NBFCs or shadow banks maintain a statutory liquidity ratio (SLR).
As of now, banks are mandated to maintain SLR or the minimum percentage of deposits that they must hold in the form of liquid cash, gold or government securities at 18%.
Another suggestion that could be made is for NBFCs be required to maintain a cash reserve ratio (CRR). CRR stands at 3%, below the usual 4% level, after a temporary reduction by RBI due to the ongoing pandemic that will be reversed after 31st March.
“As a security, to ensure sustainability and also to ensure liquidity for NBFCs, SLR and other steps, like CRR are being contemplated,” said of the officials.
The move could be a large strain for the sector which is currently liberated from maintaining these reserve ratios, which allows them to give loans to subprime lenders as well.
The proposal is expected to recommend a phased implementation of the reserve ratios, allowing the NBFCs time to apply the norms, according to the official.
RBI Governor Shaktikanta Das, said in reference to the increased regulation in recent years for banks and shadow banks, “Cost of compliance to rules and regulations should be perceived as an investment, as any inadequacy in this regard will prove to be detrimental.”
One official claimed that this move was to save shadow banks from failures that could pose systemic risks and is expected to encourage some of the larger ones to move towards becoming full-time banks.
Shadow banks do not share the same opinion as they believe it will hurt their operations. They are privy to “certain flexibilities which allow them to do last-mile financing which banks can’t do” said an executive of an NBFC. He continued that “blurring the lines” between banks and nonbanks would “be detrimental for India, where financial inclusion is still low.”
At its last monetary policy meeting last month, Das said regulations of shadow banks need review and that a discussion paper would be prepared by mid-January.
There are almost 10,000 shadow banks in India but only over two dozen are thought to be large enough to pose systemic risks, the sources said.
Raising liquidity ratios “or other liquidity buffers could pose a drag on their earnings,” said A.M. Karthik, head of financial sector ratings at ICRA. Lenders will also have to manage their treasuries more effectively, which would entail additional operating costs, he said.
The RBI will also recommend stricter checks on thousands of smaller nonbanks, one official said. The central bank may not propose norms such as SLR or CRR, but it will recommend more scrutiny of their books, the official said.
