RBI may restrict shadow lenders from overlapping with parent companies
What's the story
The Reserve Bank of India (RBI) is considering a proposal to limit shadow lenders from conducting business activities that conflict with their parent company's, according to Bloomberg. The move, which is already being considered for banks, comes as part of the regulator's efforts to reduce risks in a sector that has faced challenges in recent years. The discussions are ongoing with select non-banking finance companies (NBFCs).
Risk mitigation
Concerns over risks from duplicate businesses
The RBI is worried that duplicate businesses, which could bring in more customers, may lead to complicated lending structures, thereby increasing risks. These structures could bring in more customers but also pose potential threats. The proposed rules are likely to impact large gold finance companies with micro-finance arms providing loans against gold as collateral.
Regulatory balance
Balancing act for RBI
The RBI has been closely monitoring potential risks in the sector and has warned shadow lenders against reckless growth. However, Deputy Governor Swaminathan Janakiraman clarified at a March conference that the regulator's intention is not to stifle innovation but to ensure sustainable growth and well-managed risks. This approach is part of the RBI's broader strategy to harmonize regulations between banks and shadow lenders as they gain prominence in India's financial landscape.
Market influence
Banks seek partners to divest consumer loan subsidiaries
The RBI's stricter scrutiny has already forced several banks, including HDFC Bank and Axis Bank, to look for partners to acquire their consumer loan subsidiaries. This is in line with the regulator's proposal from October last year, which suggested no overlap in lending activities between a bank and its entities. The move is part of the RBI's broader effort to streamline operations within India's financial sector.