Reserve Bank of India Deputy Governor M Rajeshwar Rao on Friday cautioned that the failure of any giant non-banking finance firm (NBFC) or housing finance firm (HFC) might translate right into a threat 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 mentioned 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 mentioned.
Rao mentioned it’s on 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, could also be optimum method the place the extent of regulation and supervision can be a perform of the dimensions, exercise, and riskiness of NBFCs, he added.
Under the proposed framework, NBFCs can be categorised into 4 layers — base layer, center layer, higher layer, and a attainable prime layer.
The concept is to introduce prudential laws and intensive supervision for such entities proportionate to their systemic significance.