RBI's Crackdown Against Large NBFCs Can Have A Ripple Effect, Say Experts
The RBI's approach is to take actions that has a "demonstration impact" against big players in the sector.
The recent spate of regulatory actions by the Reserve Bank of India on non-bank lenders follows a "demonstration impact" approach against big players in the sector, but business stoppages can hit market confidence and create a ripple effect, say experts.
"The RBI has not stopped businesses before. As long as these stoppages come with adequate warning to improve systems, I don't think the actions are misplaced," Abizer Diwanji of EY India told NDTV Profit. "Such actions can have a ripple effect on sentiment."
The market reaction to the stoppage of businesses hits the confidence of investors in those entities and leads to a run on the stock, he said. "The impact is large. It's important to publicly disclose the reasons (for regulatory actions)."
In the last few weeks, the central bank has taken a series of regulatory actions against companies for alleged non-compliance with rules.
The RBI directed JM Financial Products Ltd. on Tuesday to stop any form of financing against shares and debentures with immediate effect. It banned IIFL Finance Ltd. from disbursing gold loans with immediate effect. In February, the RBI restricted Paytm Payments Bank from accepting fresh deposits, top-ups or credit transactions in its account after March 15.
The RBI's approach is to take actions that have a "demonstration impact" against big players in the sector, said Rajnish Kumar, former chairman of the State Bank of India. "The message is clear from the RBI: follow the rules. If you take action against the bigger ones and (it is) seemingly harsh, it sends out a message."
Kumar, who is chairman of BharatPe and non-executive chairman of Mastercard India, said the central banks' action against unsecured loans last year was preemptive in nature to ensure risk management, while action against fintechs is for non-compliance.
"There is no issue in the overall (financial) system; banks have never been in such a good shape," the former State Bank of India chief said, noting the challenge the RBI has in regulating over 9,000 non-bank lenders and a rapidly evolving fintech space.
For investor confidence, it's important that companies follow the rules and that there exists a strong regulatory oversight, Kumar said.
Watch the full conversation here:
