ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Bank-like Regulations for Non-banking Financial Companies

The purpose of this article is to address some of the lacunae in the scale-based framework proposed by the Reserve Bank of India in a discussion paper on non-banking financial companies that have turned a blind eye to the growth aspect and recognising only the stability by minimising the possibility of systemic risk. In this context, the introduction of pyramid-based structure of NBFCs is found to be lacking a common parameter for classification of companies in different layers. Further, the revision of threshold asset size limit for identifying systemically important non-deposit taking NBFCs from `500 crore to `1,000 crore is found be undervalued, which will result into making the smaller asset sized NBFCs subject to stricter prudential norms.

The Changing Face of Indian Banking

Indian banking is passing through its most severe period of stress in over a decade. It is important, however, not to draw conclusions for banking policy from a snapshot of the most recent period--the totality of the post-reform experience must be taken into account. That larger experience shows that India's public sector-dominated banking system has served the economy well by improving its performance in respect of both efficiency and stability. Looking ahead, changes in governance and management are required, but it is possible to effect these within the framework of public ownership.

Fatal Flaw in Private Banking Systems

It is in the interest of banks to expand the supply of credit, and most banking regulations are designed to limit this tendency. It is in the interest of private bank managers to give in to this tendency (in self-interest) and provide credit indiscriminately, irrespective of macroeconomic considerations, as the 2007 crisis has shown. Perhaps we could all learn from India’s risk-averse public sector banks, which are stressed from time to time, but have never seen multiple bank failures.
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