The Reserve Bank of India (RBI) has been aggressive over the Non-Banking Financial Companies (NBFCs) in the last week coming down on two key entities.
RBI had put curb on the IIFL gold loan business directing the company to cease and desist, with immediate effect, from sanctioning or disbursing gold loans or assigning/ securitising/ selling any of its gold loans.
Also Read: RBI bans IIFL Finance from sanctioning fresh gold loans
Further, a day later, the RBI directed JM Financial to cease and desist, with immediate effect, from doing any form of financing against shares and debentures, including sanction and disbursal of loans against Initial public offering (IPO) of shares as well as against subscription to non-convertible debentures (NCDs).
The NBFC sector in India is experiencing a transformation in its funding dynamics as deposit-taking entities face increased regulatory scrutiny from the RBI.
Reportedly, this shift is driven by a combination of factors, including regulatory stringency, the RBI’s cautious approach to issuing fresh deposit permits, and challenges faced by small and medium-sized NBFCs in building a substantial deposit base.
Investors dumped NBFCs stocks
The concerns were raised so much so that the investors dumped NBFCs stocks and moved their money to bank shares amid fear of a broader crackdown on the sector by the RBI.
After the RBI’s move on IIFL, the shares of the company hit their 20% lower limit.
According to the experts, the correction in NBFC stocks is likely to continue for another few weeks.
Further, there are anticipation of temporary implications for credit expansion too. Emkay Global has believed that the RBI’s moves will have temporary implications for credit expansion.
Although the benefits in the long run will outweigh short-term pains.
“We believe these punitive actions will impact systemic growth for NBFCs in the near term, but will hopefully curb unethical business practices, avert systemic collapse as seen in the past,” Emkay Global said.
“We believe that the list of financial penalties, and even of business embargos, is likely to scale up and should thus keep regulated entities and fintechs on edge,” it added.
NBFCs may reconsider reliance on deposits
As per the industry experts, NBFCs will reconsider their reliance on deposits amid RBI tightening its scrutiny on the activities.
While larger NBFCs with good credit ratings and established brand names may continue to attract deposits, smaller entities are likely to explore alternative funding avenues.
Notably, there has been a resurgence in demand among NBFCs for deposit licences, driven by the high cost of borrowing.
Deposit-taking NBFCs operate under stringent regulations, irrespective of their size and scale.
The RBI has been vocal about discouraging deposit acceptance by NBFCs, considering it an uncharacteristic shift for these entities to emulate traditional banks.
