Government Gives Central Bank More Power to Regulate Shadow Lenders

The government announced measures to strengthen oversight of the country's shadow banks and improve their access to funding by providing guarantees for purchases of their assets.

The Reserve Bank of India will now be the regulator of housing finance firms, replacing the National Housing Bank, Finance Minister Nirmala Sitharaman said during her budget speech on Friday.

The government will also provide a one-time partial credit guarantee for loan losses to state banks that buy as much as Rs 1 lakh crore ($14.6 billion) of high-rated pooled assets of non-banking finance companies, Ms Sitharaman said.

The decision follows concerns that a broader financial crisis may emerge as firms like Dewan Housing Finance Corp. and Anil Ambani's Reliance Capital Ltd. struggle to find fresh funding. The cash crunch at such firms could weaken the financial system and economy given their large lending role and ties with banks, mutual funds and insurers.

The credit guarantee announcement pushed up shares of NBFCs. Mahindra & Mahindra Financial Services Ltd. and L&T Finance Holdings Ltd. jumped more than 5 per cent, while Shriram Transport Finance Co. rose more than 3 per cent.

“NBFCs that are fundamentally sound should continue to get funds from banks and mutual funds without being unduly risk averse,” Ms Sitharaman said.

The crisis emerged a year ago when Infrastructure Leasing & Financial Services defaulted on a series of debt obligations. Since then, banks and mutual funds have reduced their exposure to the industry, causing shadow lenders to restrict new loans.

India has more than 9,000 NBFCs, of which about 350, including deposit-taking firms, are listed as systemically important by the RBI. While NBFCs typically haven't been as tightly regulated as banks, that is now changing.

The RBI has proposed plans to tighten NBFCs' asset-liability management and liquidity coverage ratios. It has also resisted demands from within the industry to provide a separate liquidity window for NBFCs.

RBI Governor Shaktikanta Das said in a speech last month that the central bank will take more steps to monitor NBFCs closely, including more frequent supervision of their books.