Govt-Owned NBFCs May Face Increased Regulatory Oversight After RBI’s Proposed Classification Norms

While the latest proposal by the Reserve Bank of India (RBI) for the classification of shadow banks has brought clarity for the public listing of companies like Tata Sons, the norms may also strip away the shield enjoyed by state-owned firms.

Many government-owned non-banking financial institutions (NBFCs) will come under the upper layer classification of shadow banks if the RBI’s asset-size-based norms are implemented.

The RBI has proposed a simpler classification of shadow banks last week. Under the proposal, any NBFC with assets of Rs 1 lakh crore will be classified as upper layer.

This replaces the existing criteria of classification, which includes a top-ten asset ranking with a complex parametric scoring method.

The banking regulator has also proposed the removal of the shield given to state-owned NBFCs from upper layer classification.

NBFCs like Power Finance Corporation, REC, Indian Railway Finance Corporation, and Housing & Urban Development Corporation may also be classified as upper layer shadow banks if the proposed norms are implemented.

This would also bring these NBFCs under heightened oversight similar to their private peers.

According to a report by The Economic Times, Power Finance Corporation had an asset base of Rs 12 lakh crore as of December. REC also had an asset base of Rs 6 lakh crore.

Moreover, the government has already proposed the merger of the two entities to create a larger financier of the power sector.

Another government-owned entity, IRFC, had assets of almost Rs 5 lakh crore, while HUDCO held about Rs 1.3 lakh crore in assets.

Ownership-independent and asset-based classification of NBFCs will provide clarity to stakeholders, according to experts.

However, there is a possibility that companies like Sammaan Capital and PNB Housing Finance would fall out of the upper layer category as their asset bases may not cross the Rs 1 lakh crore mark.