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

New Delhi, Feb 8 India's 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 country's largest non-banking finance companies (NBFCs) to implement a risk-based internal audit framework, in line with banks. The framework requires an NBFC's 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, Moody's 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 framework's application to the largest NBFCs reflects the RBI's 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.