Failure of a large NBFC can disrupt small, mid-sized ones: RBI Deputy Governor

Reserve Bank of India Deputy Governor M Rajeshwar Rao on Friday cautioned that the failure of any large non-banking finance company (NBFC) or housing finance company (HFC) may translate into a risk to its lenders with the potential to create a contagion.

“Failure of any large and deeply interconnected NBFC can also cause disruption to the operations of the small and mid-sized NBFCs …,” he said at a CII NBFC summit.

“While we are aware that differential regulation in NBFC sector is required to allow it to bridge the gap in last mile connectivity and exhibit dynamism, this premise remains valid till the time their scale of operations is low,” he said.

Rao said it is in this background that “we have conceptualised the scale-based regulatory framework aligning it with the changing risk profile of NBFCs.”

A scale-based regulatory framework, proportionate to systemic significance of NBFCs, may be optimal approach where the level of regulation and supervision will be a function of the size, activity, and riskiness of NBFCs, he added.

Under the proposed framework, NBFCs would be categorised into four layers — base layer, middle layer, upper layer, and a possible top layer.

The idea is to introduce prudential regulations and intensive supervision for such entities proportionate to their systemic significance.