RBI Considers Halting Shadow Banks From Duplicating Business
The central bank has been watchful of potential blowups in the sector, and has warned shadow lenders it would not hesitate to take action against firms that pursue reckless growth.
Photographer: Dhiraj Singh/Bloomberg
India’s regulator is mulling getting shadow lenders to cut down business activities of subsidiaries that clash with those of the parent, in line with rules already proposed for banks, said people with knowledge of the matter.
The Reserve Bank of India has been discussing this proposal with some non-banking finance companies, the people said, asking not to be identified discussing private conversations, as the regulator seeks to cut down risks in a sector that blew up a few years ago. More guidance from the regulator, especially on any overlaps in the lending business between subsidiaries and their parent firm, is expected to be issued soon, they said.
The central bank has been watchful of potential blowups in the sector, and has warned shadow lenders it would not hesitate to take action against firms that pursue reckless growth. In this case, the RBI is concerned that duplicate businesses, that could bring in more customers, may lead to complex lending structures that increase risks, the people said.
Any fresh RBI directive could mainly hit large gold finance companies that have their micro-finance arms disbursing loans by taking the precious metal as collateral, the people said.
The RBI didn’t respond to an email seeking comment.
The proposed rules are also aimed at harmonizing regulations between banks and shadow lenders as the latter become more important. Their rapid growth in the last few years has boosted credit flows and helped financial inclusion, though the aggressive expansion has also drawn crackdowns from the regulator.
RBI deputy governor Swaminathan Janakiraman said at a conference in March that the regulator’s intent toward shadow lenders is not to stifle innovation. Instead, it is to ensure sustainable growth and well-managed risks, he said.
Several banks like HDFC Bank Ltd. and Axis Bank Ltd. have had to scout for partners to buy their consumer loan subsidiaries after the RBI tightened scrutiny. The regulator proposed in October last year that there should not be an overlap in the lending activities undertaken by the b\ank and its entities.
