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Essay: Retail Lending – NBFCs to match Banks in retail lending

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  • Published: 12 September 2015*
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  • Words: 1,271 (approx)
  • Number of pages: 6 (approx)

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According to a study done by CRISIL which is one of the leading credit rating agencies in India, non-banking financial companies (NBFCs) are well-positioned to establish a stronger presence in the retail finance space, and match the non-mortgage retail lending portfolio of banks within next 2 years
The recent trends of strong growth and improving asset quality and profitability are likely to continue, strengthening the credit risk profiles of NBFCs over the medium term. Nevertheless, NBFCs may face challenges on other fronts. Given their increasing role in the financial sector, NBFCs will need to adapt to a more stringent regulatory environment over the medium term. Competition in the NBFC sector will also intensify, and players will need to diversify their resource profiles, maintain competitive borrowing costs, and ensure availability of skilled human resources to maintain growth.
According to CRISIL, ‘NBFCs continue to play a critical role in making financial services accessible to a wider set of India’s population, including semi-urban and rural areas, which account for majority of the NBFCs’ business. With their keen understanding of customer needs, NBFCs remain focused on product innovation and customization’factors that will help them gain an edge over banks while maintaining their niche positioning. NBFCs can, therefore, double their loan portfolio, and even match the market share of banks in the non-mortgage retail finance space.’
‘In its transition to the next phase of growth, the NBFC sector will face the test of a tighter regulatory framework, which is consistent with its emerging systemic importance and larger size. CRISIL believes that enhanced regulations will reduce the sector’s regulatory arbitrage vis-??-vis banks, moderate growth and profitability in certain product segments, and improve transparency.’ The competitive landscape in the retail finance sector could change, given the likelihood of some NBFCs converting to banks, and entry of new players, including captive finance entities.
2. Regulation: Report of the Financial Sector Legislative Reforms Commission (FSLRC)
The Financial Sector Legislative Reforms Commission was constituted by the Government of India, Ministry of Finance, in March, 2011. The setting up of the Commission was the result of a felt need that the legal and institutional structures of the financial sector in India need to be reviewed and recast in tune with the contemporary requirements of the sector.
The Commission proposes a financial regulatory architecture featuring seven agencies.
This proposal features seven agencies and is hence not a ‘unified financial regulator’ proposal. It features a modest set of changes, which renders it implementable:
1. The existing rbi will continue to exist, though with modified functions.
2. The existing sebi, fmc, irda and pfrda will be merged into a new unified agency.
3. The existing Securities Appellate Tribunal (sat) will be subsumed into the fsat.
4. The existing Deposit Insurance and Credit Guarantee Corporation of India (dicgc) will be subsumed into the Resolution Corporation.
5. A new Financial Redressal Agency (fra) will be created.
6. A new Debt Management O_ice will be created.
7. The existing fsdc will continue to exist, though with modified functions and a statutory framework.
The functions of each of these seven proposed agencies are as follows:
Reserve Bank of India It is proposed that rbi will performthree functions: monetary policy, regulation and supervision ofbanking in enforcing the proposed consumer protection law and the proposed micro-prudential law, and regulation and supervision of payment systems in enforcing these two laws.
Unified Financial Agency The unified financial regulatory agency would implement the consumer protection law and micro-prudential law for all financial firms other than banking and payments.
This would yield benefits in terms of economies of scope and scale in the financial system; it would reduce the identification of the regulatory agency with one sector; it would help address the difficulties of finding the appropriate talent in Government agencies.
This proposed unified financial regulatory agency would also take over the work on organized financial trading from rbi in the areas connected with the Bond-Currency-Derivatives Nexus, and from fmc for commodity futures, thus giving a unification of all organised financial trading including equities, government bonds, currencies, commodity futures and corporate bonds.
The unification of regulation and supervision of financial firms such as mutual funds, insurance companies, and a diverse array of firms which are not banks or payment providers, would yield consistent treatment in consumer protection and micro-prudential regulation across all of them.
Financial Sector Appellate Tribunal The present SAT will be subsumed in fsat, which will hear appeals against rbi for its regulatory functions, the unified financial agency, decisions of the fra and some elements of the work of the resolution corporation.
Resolution Corporation The present dicgc will be subsumed into the Resolution Corporation which will work across the financial system.
Financial Redressal Agency The fra is a new agency which will have to be created in implementing this financial regulatory architecture. It will setup a nationwide machinery to become a one stop shop where consumers can carry complaints against all financial firms.
Public Debt Management Agency An independent debt management o_ice is envisioned.
Financial Stability and Development Council Finally, the existing fsdc will becomea statutory agency, and have modified functions in the fields of systemic risk and development.
The key change that FSLRC proposes to bring about is an ‘activity’ based regulation as against the prevailing ‘entity’ based regulation.
3. Partnerships & Convergence of Banks & NBFCs: Report of The Committee on Comprehensive Financial Services for Small Businesses and Low Income Households
Terms of Reference
1. To frame a clear and detailed vision for financial inclusion and financial deepening in India.
2. To lay down a set of design principles that will guide the development of institutional frameworks and regulation for achieving financial inclusion and financial deepening.
3. To review existing strategies and develop new ones that address specific barriers to progress and that encourage participants to work swiftly towards achieving full inclusion and financial deepening, consistent with the design principles.
4. To develop a comprehensive monitoring framework to track the progress of the financial inclusion and deepening efforts on a nationwide basis.
5. Any other related issue/s the Committee may want to opine on.
Committee Chair:
Dr. Nachiket Mor, Central Board Member, Reserve Bank of India
The Committee recognizes that a partial convergence of NBFC and Bank regulations may be desirable. It has recommended that
Under the Banking Regulation Act, a set of banks may be licensed which may be referred to as Wholesale Banks. For this the gradual transition of eligible and interested NBFCs to Wholesale Consumer Banks or Wholesale Investment Banks or National Banks should also be facilitated.
These Wholesale Banks should have the following characteristics:
a. Given that their primary role is lending and not the provision of retail deposit services, they will only be permitted to accept deposits larger than Rs. 5 crore.
b. In view of the fact that they will not take retail deposits, the minimum entry capital requirement for them will be Rs. 50 crore compared to the Rs. 500 crore required for full-service SCBs.
c. If the institution has fewer than twenty branches through which it operates, it will not be required to meet the 25 per cent branching requirement. Institutions with twenty or fewer branches could be referred to as Wholesale Investment Banks while those with a larger branch network could be referred to as Wholesale Consumer Banks.
d. Wholesale Consumer Banks should be permitted to act as Banking Correspondents for other full service Banks.
They will be required to comply with all other RBI guidelines relevant for Scheduled Commercial Banks and will be granted all the other rights and privileges that come with that licence.
This shall go a long way in catering to the need to provide a level playing field for banks and NBFCs.

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