RBI can now control the compensation of an NBFC’s senior management or even call for audits
RBI has been seeking more powers for a while and the government seems to have listened
The government is pushing back against sustained criticism on erosion of institutional autonomy and is looking to change the narrative over the independence of the central bank, starting with powers over non-banks. Following the crisis at non-banking financial companies (NBFCs), the Union budget has expanded the Reserve Bank of India’s (RBI’s) powers over them and allowed it to supervise housing finance companies (HFCs).
RBI has been seeking more powers for a while and the government seems to have listened, except for one key item: expanded powers to regulate public sector banks (PSBs). There is another hitch, on whether RBI has the capacity to discharge its expanded role.
The Union budget proposed to amend the RBI Act 1934, empowering the central bank to supersede the board of NBFCs (other than those owned by the government) and enable resolution of financially troubled NBFCs through a merger or by splitting them into viable and non-viable units called bridge institutions. RBI can also remove auditors, call for audit of any group company of an NBFC, and have a say over the compensation of senior management.
NBFCs were till now governed by the Companies Act even as they were regulated by RBI. The change follows the crisis at Infrastructure Leasing and Financial Services Ltd (IL&FS), which led to a liquidity crunch across the NBFC-HFC sector. The crisis also sparked questions about the supervision of these lightly-regulated institutions. The Serious Fraud Investigation Office (SFIO) looking into the IL&FS crisis had also noted that timely RBI intervention could have averted the crisis.
“These issues were no one’s baby till a few months ago. A realization has come up that the government or PSBs cannot control these issues and that RBI is the best institution to handle these. Therefore, there is a constructive creative engagement from the government’s side," said Sachin Chaturvedi, RBI board member.
According to Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services, RBI should now focus more on large NBFCs and HFCs, now that it has more powers.
“I think it is a very smart move to bring HFCs under the ambit of the banking regulator. All along, RBI has been seeking these. It has always admitted that at the moment, under the RBI Act, it does not have total powers. As the government is giving them these powers through the Finance Bill itself, the approval process becomes faster. Moreover, RBI will choose to focus on the large non-banks and HFCs from now on because it is not an easy task to regulate more than 9,000 such entities," he said.