Why in the News?

During the transition to the Scale-Based Regulation (SBR) framework, the NBFC sector experienced double-digit credit growth, maintained adequate capital levels, and saw a reduction in delinquency ratios.

What are the key points presented by RBI on the resilience of the NBFC sector?

• Improvement in Asset Quality: Since the introduction of the Scale-Based Regulation (SBR) framework in October 2022, the asset quality of NBFCs has improved, with lower gross non-performing asset (GNPA) ratios.
  • By December 2023, GNPA ratios had decreased to 2.4% for government-owned NBFCs and 6.3% for non-government NBFCs, reflecting enhanced risk management.
• Double-Digit Credit Growth: The NBFC sector maintained strong credit growth throughout 2023, driven by a diversified funding base, including retail credit (gold loans, vehicle loans, and housing loans) and expanding into industrial and service sectors.
• Improved Profitability: The sector witnessed a rise in profitability, as evidenced by better returns on assets (RoA) and equity (RoE).
• Net NPA (NNPA) Performance: Upper layer NBFCs had lower GNPA ratios than middle layer NBFCs, but the latter maintained sufficient provisions for riskier portfolios, ensuring that their NNPA ratios were also controlled.
• Compliance with SBR: Major NBFCs in the “Upper Layer” identified by the RBI under the SBR framework, such as LIC Housing Finance, Bajaj Finance, and L&T Finance, have complied or initiated steps to comply with listing requirements.

Regulatory measures  taken up by the NBFC sector 

• Scale-Based Regulation (SBR) Framework: Introduced in October 2022, the SBR framework categorizes NBFCs into different layers based on their size, systemic importance, and risk profile. For instance, strengthen asset quality, capital requirements, and risk management.
• Prompt Corrective Action (PCA) Norms: Effective from October 2024, PCA norms will apply to government-owned NBFCs. These measures aim to enhance financial discipline, focusing on capital adequacy and asset quality.
• Diversification of Funding Sources: Due to rising risk weights on bank lending, NBFCs have diversified their funding base by reducing dependence on bank borrowings and expanding into secured retail credit.
• Listing Compliance: Many NBFCs in the upper layer have complied or are in the process of complying with listing requirements as part of regulatory mandates.

What are the emerging risks that NBFCs need to cater? (Way forward) 

• Cybersecurity Risks: With the increasing use of digital platforms, NBFCs need to enhance cybersecurity measures to safeguard against evolving cyber threats.
• Climate Risk: The financial impact of climate change poses a new risk. NBFCs must integrate climate-related risks into their risk management frameworks to mitigate potential disruptions.
• Financial Assurance Functions: The RBI emphasizes that assurance functions like risk management, compliance, and internal audit are critical in maintaining resilience in the face of rapid changes in the financial landscape.
• Evolving Regulatory Environment: As the financial sector continues to evolve, NBFCs must stay ahead of regulatory changes and ensure that their risk management practices are aligned with emerging threats and new regulations.

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