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The Working Group Submits Its Report on Issues and Concerns in the Non Banking Financial Companies Sector
On 29 August 2011, the Reserve Bank of India placed the report of the Working Group on its website, soliciting comments from various stakeholders. The mandate for the Working Group was to revisit the broad principles that underpin the regulatory architecture for NBFCs. Firstly, to identify risks from gaps in regulations, regulatory arbitrage possibilities and the inter-connectedness of various activities and entities of the financial system. Secondly, it was to recommend regulatory and supervisory measures to address these risks to improve resilience for the Indian financial sector.
Taxand India has summarised the recommendations made by the WG and compared this with the existing regulatory framework for NBFCs under the following parameters:
- Principal business
- Funding pattern based classification
- Size based classification
- Activity-based classification
- Definition of 'financial institution'
- Capital Adequacy
- Regulatory arbitrage
- Mergers, acquisitions and change in control or transfer of shareholding
The WG's recommendations are a step in the right direction and, if accepted and implemented properly should help mitigate systemic risks and at the same time structurally strengthen the Indian financial sector.
The higher risk weights placed on sensitive sectors, the increase in minimum Tier I Capital and stipulated liquidity requirements will better cushion NBFCs against potential asset-side and liquidity risks. The recommendations will also help reduce regulatory arbitrage between banks and NBFCs and help ensure that NBFCs focus their attention on undertaking financial activity and do not diversify into non financial activities. The WG has adopted a practical approach to ensure that RBI's regulatory resources are efficiently utilized by stipulating a minimum asset size and encouraging smaller NBFCs to either ramp up their operations or deregister themselves.
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