In an attempt to enhance the oversight of regulated entities, the Reserve Bank of India (RBI) will use scale-based approach factors in systemic risk contribution while regulating non-banking financial companies (NBFCs). The regulator will also prescribe norms for dividend distribution by NBFCs.
Also, as a step towards strengthening the audit systems, the financial sector regulator will issue norms for large urban co-operative banks (UCBs) and NBFCs to adopt a risk-based internal audit (RBIA).
In regulatory measures announced along with the monetary policy review, the RBI said it would harmonise the guidelines for appointing statutory auditors for commercial banks, UCBs, and NBFCs.
The RBI is bringing in the standard of supervision of UCBs and NBFCs proportionately on a par with commercial banks to further the goal of a unified supervisory function.
Raj Kiran Rai G, chairman, Indian Banks’ Association, and managing director (MD) and chief executive officer (CEO), Union Bank of India, said steps like scale-based regulatory approach for NBFCs, RBIA for UCBs and NBFCs would help improve the regulatory and supervisory mechanisms.
The steps regarding dividend distribution, scale-based regulatory framework for NBFCs and strengthening of audit systems will bring in more transparency and efficiency to the financial sector, said Rajiv Sabharwal, MD and CEO, Tata Capital. Further, the interlinkages between these segments require all constituents of the market to follow a robust mechanism to ensure financial stability, he added.
The steps regarding dividend distribution, scale-based regulatory framework for NBFCs, and strengthening of audit systems would bring in greater transparency and efficiency to the financial sector, said Rajiv Sabharwal, MD and CEO, Tata Capital.
The RBI said there had been significant increase in the size and inter-connectedness of the NBFC sector. There is, therefore, a need to review the regulatory framework, in line with the changing risk profile of NBFCs.
At present, the regulatory regime governing the NBFC sector is built on the principle of proportionality, such that adequate operational flexibility is available to the sector through calibrated regulatory measures.
The RBI will release a discussion paper on this before January 15, 2021, inviting public comments.
About dividend distribution policy by NBFCs, the RBI said unlike banks, there are no guidelines for distribution of dividend by NBFCs. Having norms for dividend distribution by finance companies has become necessary due to their increasing significance in the financial system and their interlinkages with different segments.
Different categories of NBFCs will be allowed to declare dividend, according to a matrix of parameters, subject to a set of generic conditions.
As for the internal audit function, the RBI said it was as third line of defence, which needs to be strengthened in UCBs and NBFCs. RBIA was mandated by the RBI for commercial banks in 2002.
It has now been decided to issue guidelines to large UCBs and NBFCs on the adoption of RBIA. This will enable the creation of an independent risk-focused internal audit system.
The RBI will harmonise guidelines on the appointment of statutory auditors for commercial banks, UCBs, and NBFCs to enable supervised entities to appoint audit firms, according to their needs in a timely, transparent, and effective manner. This is expected to improve the quality of financial reporting of supervised entities. Guidelines on the same will be issued separately.