Basel-based Financial Stability Board (FSB) has recommended that the Reserve Bank of India (RBI) should step up the regulatory oversight over non-banking finance company (NBFC) categories and housing finance companies (HFCs) as many of them are subsidiaries of financial conglomerates or mixed-activity economic groups vulnerable to contagion or reputational risks.

In its Peer Review of India, FSB, an international body that monitors and makes recommendations about the global financial system, said the RBI consider rationalising the number of non-banking finance company (NBFC) categories and continue to harmonise NBFC prudential rules with those for banks. The RBI should also consider revising the use of the term “systemically important” NBFCs in order to align its meaning with that for banks, it said in a report.

FSB also said there is no comprehensive periodic report on the activities or decisions of the Financial Stability and Development Council while the communication of the FSDC and FSDC sub-committee (a panel that comprises financial regulators in India) meetings on the finance ministry or the RBI websites tends to be brief and often does not describe the judgements considered or the decisions made. It may be useful to market participants and the public if communication on the deliberations of the authorities on macroprudential policy was enhanced, FSB said.

FSB has said the RBI should continue to review the business criteria definition for NBFCs on a regular basis to ensure the thresholds remain appropriate, and to work with other authorities to strengthen enforcement of the regulatory perimeter.
The authorities should also review the merits of continuing to allow deposit-taking activities by non-financial firms, and eliminate regulatory exemptions for government-owned NBFCs.

The RBI should continue to improve the timeliness and granularity of data collected from non-banking financial entities (NBFEs), and enhance their analysis by carrying out horizontal reviews across different types of entities (such as banks, NBFCs and HFCs) operating in the same market segment, FSB said. “The authorities should enhance their assessment of risks stemming from NBFEs by extending the scope of coverage to HFCs and by broadening the analysis to other material risks (e.g. liquidity and contagion),” FSB said.

“A more comprehensive and integrated risk assessment for NBFCs would contribute to a better understanding of their vulnerabilities and implications for the rest of the financial system. This is motivated by the large and growing dependence of NBFCs on the rest of the financial system for funding purposes and the fact that experience (both in India and elsewhere) suggests that such funding tends to dry up in the event of external or sector-specific events, potentially leading to a liquidity crunch and creating a negative feedback loop,” it said.

FSB review said risk assessments should also be extended to HFCs, since they are an important component of the housing market and have become increasingly interconnected with the banking sector. While the NHB has improved its off-site surveillance of HFCs, it does not currently conduct any stress tests of the sector.