Monday 7 March 2011

RBI Working Group On Non Banking Finance Companies

The Reserve Bank of India (RBI) on Monday announced setting up of a working group to examine issues pertaining to regulation, governance and supervision of Non-Banking Finance Companies (NBFC) operating in India. The working group is headed by Usha Thorat, former Deputy Governor of RBI.

The working group would also stress upon definitional and classification issues and address the regulatory gaps between exiting regulatory frameworks for NBFCs. The group would also focus on maintaining standards of governance in the sector and provide appropriate approach to NBFC supervision

The NBFC sector in India has undergone a significant transformation in the past few years and has come to be recognised as a systemically important element of the financial system. The recent global financial crisis also highlighted the regulatory imperatives concerning the non-banking financial sector and the risks arising from regulatory gaps, arbitrage and systemic inter-connectedness. A need was, therefore, felt to reflect on the broad principles that underpin the regulatory architecture for NBFCs, keeping in view the economic role and heterogeneity of this sector and the recent international experience.

RBI has also announced in the past a regulatory framework for Core Investment Companies (CICs) that are systemically important. These CICs hold assets predominantly as investments in shares of group companies and not carry on any other financial activity. These CICs also deserves a differential treatment than NBFC hence RBI announced the regulatory framework for CICs on August 12, 2010.

As per that regulatory framework, CICs were distinguished from the regulatory guidelines applicable to NBFCs in general. Recently, a revised framework was issued on January 5, 2011, which further liberalised the earlier regulatory framework.

On top of this, RBI is in the process of formulating wealth management regulation in India. This would prevent many fraudulent transactions that are presently committed in India. It seems banking reforms in India is on government agenda this year.