Stricter Regulation of NBFCs through RBI by VEDANT JAIN at LEXCLIQ

The recent crisis in the NBFC sector has raised some important question regarding the functioning and regulation of NBFC. The IL&FS crisis was an eye-opening moment for the regulatory bodies and for the govt. to put in place a strict mechanism for the regulation of the NBFCs in general. As the NBFC does not in every case need to be registered by the RBI as in case of NBFC dealing in share/bonds or insurance business or in other sectors the registration is also done by the SEBI, IRDIA etc., therefore unlike commercial banks the NBFC is not primarily regulated by the RBI. So, the govt. has now introduced the new Finance Bill 2019 which gave RBI supervisory power over the management and regulation of these NBFCs through the amendment of the RBI Act, 1934. These regulations are: –

  1. Control over Management – under a new section of 45-ID and 45-IE the RBI can control the management of NBFC. It can either change the directors of non-govt. NBFC or can replace the board of directors (BOD) of NBFC. RBI can remove the existing director and replace it with a new director for a term of 3 years which can be reappointed. Anything done by the new director in good faith will not be questioned. RBI can also place an administrator upon the BOD/partners for a term of 5 years to monitor the functioning of the NBFCs.
  2. Power to remove auditors – under section 45MA the RBI can issue direction to the auditors and now under new section 45MAA the RBI regulated NBFCs can be ordered to have special audit of their account by the auditor appointed by RBI and it can also debar/remove existing auditors of the NBFCs.
  3. Amalgamation, Reconstruction or Splitting of NBFC – under new section 45MBA the RBI can also do the activity of Amalgamation, Reconstruction or Splitting of NBFC into a viable and non-viable entity for the better performing of its objectives and also that is very important for the financial system as a whole.
  4. Inspection and Furnishing of Information of Group Companies – under section 45NAA the RBI now can order NBFC to give the details of the account statements and information regarding group companies of the NBFCs and can order inspection & audit of the same. The Government’s intention to have RBI emerge as the primary regulator in the affairs of the NBFC in crisis is clear. However, the powers proposed to be given are wide. Guidelines may be required to be framed to ensure that the powers are not exercised unless necessary. For instance, provisions pertaining to removal and, consequently, the appointment of directors and administrator, in case of emergency situations, mirror the power given to the Insurance Regulatory and Developmental Authority of India (IRDAI).

The govt’s intention in giving the above wide powers to the RBI can be understood for the better functioning of NBFCs. The more specific guidelines can also help in improving this crisis situation comprehensively. Having a check overpowers is important. Thus, over the course of time we can hope for suitable clarifications and amendments to streamline the already proposed amendments, and for subsequently for the NBFC sector to bounce back.

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