NBFCs New Governance Code introduced by the RBI

Neelansh Gupta

13 Sep, 2022

The Reserve Bank of India (RBI) is likely to tighten the certain regulations which govern Non-Banking Financial Companies (NBFCs) after the crisis at Infrastructure Leasing & Financial Services Ltd (IL&FS). Moreover, the RBI will tighten the NBFC capital adequacy norms, related party transactions, and asset-liability mismatches. However, NBFCs new Governance Code is underway.

NBFCs new Governance Code

The Reserve Bank of India (RBI)^[1] is planning to set up a new Code for the NBFCs (Non-Banking Financial Companies) which is likely to strengthen the business structure of NBFCs in India. However, the main purpose of the new Governance Code is to:

• A gradual shift to the risk-based supervision (RBS) system
• Expect a check on the licensing and businesses of bank-led units,
• Equality in CEO remuneration package with that of private banks

Apart from the above, a large number of measures are soon expected to roll out once RBI issues the official notification.

Detailed Analysis on NBFCs new Governance Code

Let us try to analyze the above changes in NBFCs new Governance Code:

• Risk-Based Supervision

One of the major purposes of Risk-based Supervision will ultimately help in regulatory supervision of NBFCs around India. Also, it is a comprehensive, formally structured system that assesses risks within the financial system, giving priority to the resolution of those risks.

• Check on Licensing and Businesses of Bank Led Units

The success of NBFCs can be clearly attributed to their better product lines, lower cost, wider and effective reach. Further with strong risk management capabilities to check and control bad debts, and a better understanding of their customer segments. Not only have they shown success in their traditional bastions (passenger and commercial vehicle finance) but they have also managed to build substantial assets under management (AUM) in the personal loan and housing finance sector which have been the bread and butter for retail banks. Going forward, after the new Governance Code, you can expect a check on the licenses and businesses of bank-led units.

• Equality in CEO Remuneration

One of the major highlights of this new Governance Code is the equality in CEO Remuneration with that of the private banks CEO. This application will bring remuneration of CEOs of both NBFC and Private Banks at par.

Our Take

The above major changes which are soon to be rolled out will bring a major change in NBFCs business structure. It will further enhance the development and bring them at par with the advantages a private bank has. Nevertheless, RBI will shortly bring the detailed notification and such developments will be further disclosed. Enterslice will update you as soon as the notification will get released.

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