RBI tightening supervision of largest NBFCs to avoid systemic spillovers: Moody’s

New Delhi, Feb 8 : Indias risk-based internal audit requirement for non-banking finance companies is credit positive, Moodys Investors Service said.

The Reserve Bank of India (RBI) issued guidelines for the countrys largest non-banking finance companies (NBFCs) to implement a risk-based internal audit framework, in line with banks.

The framework requires an NBFCs internal audit function to assess risks independently of its existing risk-management functions.The requirement is credit positive because it adds another layer of risk monitoring and improves the companies resilience to unexpected shocks, Moodys said.

The guidelines will apply to all deposit-taking NBFCs or NBFCs with assets of more than Rs 500 billion as of March 31, 2022.The frameworks application to the largest NBFCs reflects the RBIs ongoing efforts to strengthen and harmonise regulatory norms between NBFCs and banks.

The NBFC sector has been increasingly important to credit growth in India.NBFCs total balance sheet more than doubled to Rs 49 trillion in 2020 from around Rs 20 trillion in 2015.At the same time, banks exposures to NBFCs have also increased, and according to RBI data, 8.5% of gross bank credit was to NBFCs as of December 2020, compared with 4.8% in December 2016.Banks have traditionally been subject to stricter regulations and risk controls than NBFCs, creating regulatory arbitrage for NBFCs, even though they provide similar financial services.

As a result, the RBI is gradually tightening supervision of the largest NBFCs to avoid systemic spillovers.