India’s central bank has decided to increase its scrutiny over shadow bankers in the wake of recent payment defaults and bankruptcies.
The Reserve Bank of India Tuesday issued revised guidelines on a Prompt Corrective Action framework for such non-banking finance companies, excluding government-owned ones.
It said the new framework would also be applicable to all deposit-taking non-banking financial companies, investment and credit companies, core investment companies, infrastructure debt funds, infrastructure finance companies and microfinance institutions.
Prompt corrective action will mean imposing restrictions whenever vital financial metrics dip below the prescribed threshold. “The objective of the prompt corrective action framework is to enable supervisory intervention at the appropriate time and require the supervised entity to initiate and implement remedial measures in a timely manner, so as to restore its financial health,” the central bank said in its statement.
The central bank will act when there is a breach in strategy, governance, credit risk, market risk and profitability. The mandatory curbs also include restrictions on branch expansion, capital expenditure – other than for technological upgrades within board-approved limits – and curbs on reductions in variable operating costs.
The framework can also include the central bank recommending to promoters or shareholders to bring in new management or boards, removing managerial persons under the RBI Act, the removal of a director, and/or appointment of another person as director in his place.
In addition, it can even supersede the board under the RBI Act, appoint an administrator and send the shadow banker to the National Company Law Tribunal for insolvency resolution.
The new supervisory tools will be effective from October 1, next year, based on the financial position of shadow bankers on or after March 31, 2022, it said.
One of the biggest crises involving a non-banking finance company was that of IL&FS, India’s leading infrastructure finance company.
In 2017, it defaulted on payment to lenders, triggering panic in the market. IL&FS dues stand at more than 910 billion rupees (US$11.96 billion). The government appointed a new board of directors, led by noted banker Uday Kotak, which is working on ways to revive the ailing group.
The new framework is along the lines of what the Reserve Bank introduced for banks in 2002. It introduced stricter supervisory norms under the prompt corrective action framework for banks after their bad loans mounted and adversely affected balance sheets.
This involves restricting them from fresh lending, brand opening, and hiring, among others.
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