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Initiatives for strengthening NBFCs
The Reserve Bank has asked the major non-banking finance companies (NBFCs) to appoint a Chief Risk Officer (CRO) with appropriate qualifications. The Reserve Bank has asked NBFCs with assets of more than Rs 5,000 crore to appoint a CRO with the approval of the board of directors along with the prescribed terms and conditions.

The Reserve Bank has said in a notification that considering the rising role of NBFC companies in terms of credit availability, this step has been taken in order to improve the risk management system. The Reserve Bank has said that the CRO should be a senior officer in NBFCs and his experience, qualifications should be sufficient. The Reserve Bank has also said that if the NBFC is listed in the stock market, then the stock market should also be given information in this regard.

In fact, in the past months, the government has taken the control of infrastructure leasing and financial services (IL&FS). This is a one of the biggest NBFC Companies, which is associated with infrastructure financing and construction. Due to lack of capital it was unable to repay the loan's installments and interest. Due to its bankruptcy, investments of many institutions, such as the Life Insurance Corporation of India, State Bank of India, Employees Provident Fund Organization etc. has sunk, which were of the common people. Generally, in order to provide better interest, pension funds are being invested in various NBFCs.

IL & FS is a company with a capital of more than Rs.1.15 trillion, but due to mismanagement its debt increased. This company has a debt of 90 thousand crore rupees. According to an estimate, 1500 NBFS companies have lent up to Rs.22.1 lakh crore in the market. These NBFCs give loans to those people, who are unable to get loans, because of the strict rules of the bank. In the last two years, such NBFCs are major contributor in increasing Non-Performance Assets NPA). With their failure, the NPAs of the banks increased to around Rs.10,500 billion. Many times IL & FS being defaulter, its credit rating has also been downgraded.  Therefore, rating agencies should re-evaluate the ratings standards, so that NBFC can be awarded the actual rating. During the financial year 2007-2017, it has been observed that 97.92% NBFCs with "Triple AAA" rating remained in this category. Only 9.96% NBFC rating has been converted from "Triple AAA" to "Double AA"

NBFCs are registered under the Companies Act, 1956. At present, NBFCs are doing their business with the loans taking from banking system. In the years to come, many NBFC companies came into existence in the name of promoting financial inclusion, but they are doing nothing in this regard. It is clear from the current situation that in the case of NBFCs, the Reserve Bank needs to make stringent rules. At present, rules like banks are not existed in the NBFCs. It is very easy to take loans from NBFCs than banks. Therefore, the crisis similar to IL & FS may happen in near future too. Since NBFCs are also players of the financial market, it is natural to have an impact on the economy due to its sinking. For example, due to mismanagement in NBFCs, in the banks NPAs have increased about 10,500 billion rupees.

Keeping in view the risks present in NBFC, the Reserve Bank has instructed to appoint CRO in NBFCs. Hope the central bank's decision will help in reducing the potential risks in NBFCs.

About the author: Satish Singh is currently working as Chief Manager in State Bank of India's Economic Research Department, Corporate Centre, Mumbai, and has been writing mainly on financial and banking topics for the last 10 years.

Editorial NOTE: This article is categorized under Opinion Section. The views expressed in this article are solely those of the author and do not necessarily represent the views of In case you have a opposing view, please click here to share the same in the comments section.
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