InvestorQ : Is it true that the RBI is planning to regulate large NBFCs like Bajaj Finance and HDFC more like banks rather than NBFCs?
Tisha Malhotra made post

Is it true that the RBI is planning to regulate large NBFCs like Bajaj Finance and HDFC more like banks rather than NBFCs?

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Aashna Tripathi answered.
6 months ago
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This is not part of any RBI announcement but a view expressed by Rajeshwar Rao, the deputy governor of RBI, at one of the recent meetings. Here are some important aspects you must know about the statement and the implications.

· The RBI Deputy Governor Rajeshwar Rao had suggested in a speech that large NBFCs should be regulated in the same way as banks considering their systemic role.

· In fact, Rao had gone one step ahead and suggested that NBFCs above certain threshold in AUM should convert to banks or they should shrink their balance sheets smaller.

· There is an important lesson for India in the Sahara case. It showed the risk of allowing any non-banking entity to collect deposits from the public as many investors lost money.

· Sahara had underlined the need to regulate large financial non-banks more stringently. For example, HDFC it has a market cap that puts it in the 10 most valuable in the NSE.

· Take the case of Bajaj Finance. It has a tremendously retail franchise plus it has a market cap bigger than Bajaj Auto. NBFCs like Bajaj Finance manage billions of dollars of AUM and move billions of dollars as loans and as deposits.

· Rao’s point of view was that these NBFCs are participating in financial intermediation without the accountability of a bank. That is what is worrying the RBI as a principal regulator of the financial system.

· It is therefore suggested one cannot allow NBFCs to do all that banks can do without having even a fraction of the accountability that banks are subjected to.

· Banks are subjected to RBI reserve requirements like CRR and SLR, priority sector lending norms and capital adequacy requirements. Banks are also subjected to RBI scrutiny at each and every stage while NBFCs are hardly regulated.

· What Rao has suggested is that NBFCs must make the choice and be willing to be subjected to the same level of scrutiny and regulation as the banks.

· Rao also cited how globally large NBFCs like GE Capital, Fannie Mae and Freddie Mac almost crumbled in the 2008 crisis. That is something India should avoid.

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