RBI Proposes Scale-Based Regulations For Shadow Banks

As reported by several media publications, Assistant General Manager (AGM) of the Reserve Bank of India (RBI) B Mahesh while speaking at the District Level Security Committee (DLSC) and District Level Currency Management Committee (DLMC) meeting, stated that the old currency notes of Rs 100, Rs 10 and Rs 5 will eventually go out of circulation as RBI plans to withdraw them by March-April.

The proposed regulatory and compliance guidelines will bring these 25-30 large shadow banks nearly to parity with the state-owned and other private commercial banks in the country. As one moves up the pyramid, the regulatory regime will get stricter.

The discussion paper has proposed a multiple layer structure to categorise NBFCs depending on their size and interconnectedness with the system. "All Rs 100 banknotes issued earlier will also continue to be legal tender", the central bank said while announcing the issue of the new Rs 100 notes.

"In view of the recent stress in the sector, it has become imperative to reexamine the suitability of this regulatory approach, especially when failure of an extremely large NBFC can precipitate systemic risks", the RBI said.

RBI proposes harmonising the extant NPA (non-performing asset) classification norm of 180 days to 90 days for NBFC-BL.

As per the framework, a few restrictions should be extended to NBFCs in ML, including not allowing them to provide loans to companies for buy-back of shares/securities.

The paper proposes that large NBFCs must list on stock exchanges within a specified time to promote greater disclosure.

"In the past we have seen that the shadow banks have resorted to aggressive lending in the absence of such regulatory measures", said Avneesh Sukhija, senior analyst at BNP Paribas. An NBFC in the Upper Layer will be known as NBFC-Upper Layer (NBFC-UL) and will invite a new regulatory superstructure, the RBI said.

Once identified as NBFC-UL, the NBFC will be advised individually about its classification as a NBFC-UL and that it will be subjected to regulation akin to banks, the RBI said.

"It is felt that CET 1 could be introduced for NBFC-UL to enhance the quality of regulatory capital".

Given the higher systemic risk posed by NBFC-UL, the Large Exposure Framework (LEF) as applicable to banks, can be extended with suitable adaptation. There is also a Top Layer, ideally supposed to be empty. Adverse regulatory arbitrage vis-à-vis banks can be addressed for NBFCs falling in this layer in order to reduce systemic risk spill-overs, where required, the RBI said.

UPPER LAYER: Going further, the next layer can consist of NBFCs which are identified as systemically significant among. These NBFCs will occupy the top of the upper layer as a distinct set.

TOP LAYER: It is possible that considered supervisory judgment might push some NBFCs from out of the upper layer of the systemically significant NBFCs for higher regulation/supervision.