Recent regulatory measures have made the non-banking financial companies resilient to potential shocks, but lenders need to be mindful of emerging risks and challenges, especially from cyber-security and climate risk, the Reserve Bank of India said on Friday.
The RBI's scale-based regulations, extension of prompt corrective action norms to government-owned NBFCs and increasing risk weights on certain categories of retail loans have made the sector resilient to potential shocks, the paper titled Peeling the Layers: A Review of the NBFC Sector in Recent Times said.
However, the NBFCs need to remain mindful of the rapidly evolving financial landscape and the assurance functions, including risk management, compliance and internal audit, the RBI's bulletin for September said and does not necessarily reflect the views of the central bank.
In October 2022, the RBI had introduced scale-based regulations because of rapid developments in the sector along with rising interconnectedness and changing risk profile of the NBFCs.
While the sector clocked double-digit credit growth, adequate capital and low delinquency ratio at the end of December 2023 amid the transition to scale-based regulations, the PCA norms to government-owned NBFCs is expected to further strengthen the sector, the staff paper said.
With the increase in risk weights on bank lending to the NBFCs, they have begun to diversify their funding sources and decreasing reliance on bank borrowings.
Given their growing role in the Indian financial system, it is incumbent upon NBFCs to proactively identify and manage risks and bolster their assurance functions to ensure that the sector maintains a sustainable growth trajectory, the paper added.
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