Regulatory and Supervisory Approaches for NBFCs

Non-banking finance companies (NBFCs) play a critical role in the credit ecosystem by acting as last-mile financiers for the unbanked and underserved segments of the Indian economy, contributing over 20 percent of the credit to the real sector. Thus, their continued growth and orderly development are crucial to ensure both complete financial inclusion and systemic stability.

However, NBFCs are sometimes viewed as competitors to banks rather than their complements. This has led to a scenario where NBFCs are subject to prudential regulations, which are, in some cases, more stringent than those in place for banks and disproportionate to the risks posed by them. Even among NBFCs, the regulatory framework has significant inconsistencies. Finally, for regulation to be effective, it needs to be complemented by a robust supervisory mechanism and resolution process, both of which are presently inadequate.

This position paper fills in these gaps by articulating a holistic vision for the role of NBFCs in the credit ecosystem and the corresponding regulatory, supervisory and resolution frameworks that should apply to them.