The Reserve Bank of India (RBI) article has said 'going forward, as the economy recovers, Non-Banking Financial Companies (NBFCs) need to be wary of rising borrowing costs on account of normalisation of monetary policy'. It also said the non-banking lenders are poised for an expansion aided by strong capital buffers, adequate provisions and sufficient liquidity on their books.
Since May this year, the RBI has raised the policy rate by 140 basis points to tame inflation which is hovering above its tolerance band of 4-6 per cent. Following these hikes, banks have raised their lending rates, which resulted into higher borrowing cost for borrowers. It said while NBFCs have largely realigned their business models by leveraging digital channels to improve their accessibility and acquisition of new customers, this might prove to be a challenge for smaller NBFCs which may have to ramp up their technological capabilities.
It further said on the regulatory front, recognising the increasing scale and complexity of NBFCs' operations along with their rising interconnectedness with other entities in the financial system. It noted that under these regulations, the focus has been shifted from an activity-based regulation to one based on riskiness and scale of operations, following the principle of proportionality. Bank-like regulatory initiatives such as Prompt Corrective Action (PCA) Framework and Income Recognition, Asset Classification and Provisioning (IRACP) norms would further bridge the gap in regulation of NBFCs vis-a-vis banks. These regulations are expected to strengthen the NBFC sector in the times to come.
