Should NBFCs be regulated in the same way as Banks in India?

By Nayan Saraf

Indian banking sector has played a crucial role in developing the Indian economy, but if there is one segment, which would significantly make a big difference in coming years, it would be the Non-banking financial services sector. The total asset base for NBFC’s stood at more than Rs. 14.5 Lac Crore and the profit of Rs. 30,000 Cr. in the year 2015 with a CAGR of about 13% over last 3 years. This enormous growth of NBFC segment has resulted in more regulations from RBI which in effect have opened the debate whether NBFCs should be regulated in the same way as banks or not.

Over the years, RBI has changed its stance on NBFC from no regulations to over regulations. This over regulation has come into the picture in recent years after the global financial crisis where the fall of systematically important FI, Lehman Brother, resulted in systematic risk across the financial world. But many economists have argued that these over regulations are nothing but overly cautious measures by the RBI which are hampering the growth of the NBFC segment.

One reasonable argument that goes in the favour of lesser regulations for NBFCs is that unlike banks they don’t have any unsophisticated depositors. The bank’s depositors are unsophisticated as they can withdraw money from the bank at any time and the bank is liable for that. Even for fixed deposits, the principal is protected in the case of premature withdrawal. Hence, banks run the risk of having ‘Run on the bank’. On the other hand, NBFC’s do not have unsophisticated depositors as they raise money by issuing bonds and promoter’s contribution. Hence, NBFCs do not run the risk of having ‘Run on the bank’.

Second argument that goes in favour of lesser regulations for NBFCs is the low risk of asset liability mismatch. Since, NBFCs lend money which was raised through bonds and promoter’s contribution rather than depositors’ money (as they cannot accept deposits); there’s a very little chance of having asset liability mismatch. In their balance sheet, the liability would be due only on maturity. Hence they can easily manage the asset liability mismatch. On the other hand, banks that lend depositors’ money, run a higher risk of asset liability mismatch as in their balance sheet the liability can be due at any time.

These two arguments question the importance of stringent regulations on NBFCs by RBI. When NBFCs are different from banks, then why should they have the same stringent regulations? NBFCs should be more risk seeking in nature for the growth of Indian economy.