2.4.3. Increasing Influence and Regulatory Problems of NBFCs

The non-banking financial sector has evolved considerably in terms of operations, variety of market products and instruments, technological sophistication, etc. In recent years, the NBFCs have assumed increasing significance and have added considerable depth to the overall financial sector. The regulatory responses on the part of RBI have also kept pace with the evolution of this sector. In particular, regulation has adequately addressed the issue of depositor protection, a major concern of RBI.

The regulatory regime for NBFCs is lighter and different in many respects from that for the banks. The steady increase in bank credit to NBFCs over recent years means that the possibility of risks being transferred from the more lightly regulated NBFC sector to the banking sector in India can no longer be ruled out

The size of the NBFC sector based on total assets is about Rs 12.5 trillion, which is about 13% of the banking sector, whose size is about Rs 96.7 trillion by total assets. Therefore, although it is difficult to argue that the individual failure of any of the NBFCs poses a systemic risk because of the smallness of the individual sizes, it is not possible to rule out that their collective failure may pose a systemic risk to the financial system, especially in light of the bank-finance NBFC linkages.

NBFCs at times charge high interest rates from their borrowers. Reserve Bank of India has deregulated interest rates to be charged to borrowers by financial institutions (other than NBFC- Micro Finance Institution). The rate of interest to be charged by the company is governed by the terms and conditions of the loan agreement entered into between the borrower and the NBFCs. However, the NBFCs have to be transparent and the rate of interest and manner of arriving at the rate of interest to different categories of borrowers should be disclosed to the borrower or customer in the application form and communicated explicitly in the sanction letter etc.