As part of the Notes on the Indian Financial System series, Nishanth K, Dvara Research, has authored our latest research paper titled “Functioning on an Uneven Keel: Capital Regulation of Credit Intermediaries in India“.
India is a bank-dominated financial system with most of the financial assets belonging to the banking sector. However, it is yet to match the size and outreach of banking sectors as prevailing in various other emerging economies. Even after 20 years of liberalisation, close to 70% of the banking sector assets belong to Public Sector Banks (PSBs). The interesting development, however, has been the rise in the popularity of non-deposit taking NBFCs (NBFC-ND) as sources of credit. While the size of the NBFC sector is still relatively small compared to that of banks, these entities have gained market share and are the predominant source of credit in certain niche segments. In this paper, we discuss the role of non-deposit taking NBFCs in the Indian system as credit intermediaries and the regulatory regime that applies to these entities. We postulate that the regulation of credit intermediaries in the financial system should satisfy the principle of institutional neutrality. With regulatory capital for poorly performing banks set lower than relatively well-performing NBFCs, the current regulatory regime seems imbalanced in its application of prudential requirements. The paper concludes with a set of recommendations to re-design the regulatory framework of non-deposit taking NBFCs in India.
Click here to read the paper.