The 2019-20 Union budget has brought changes that broaden the authority of the Reserve Bank of India (RBI) over the Indian financial sector. Specifically, it has placed Housing Finance Companies (HFCs) under RBI jurisdiction and deepened its governance of Non-Banking Finance Companies (NBFCs). This move is chiefly credited to the liquidity crisis that occurred at Infrastructure Leasing and Financial Services Ltd (IL&FS), which indicated a pressing need for more robust oversight of NBFCs. The Serious Fraud Investigation Office (SFIO) even remarked that timely intervention by the RBI could have prevented the IL&FS crisis.
Expansion of the RBI’s Autonomy
The Union budget 2019-20 proposes amendments to the RBI Act 1934 to strengthen the central bank’s autonomous powers and increase its regulatory capacities. These changes would enable the RBI to intervene decisively to guard public interests or protect depositors and creditors from any misconduct in the operations of NBFCs. For instance, these changes allow the RBI to supersede the board of an NBFC that isn’t government-owned when necessary.
RBI’s Increased Control Over NBFC Boards
With the proposed amendments to the RBI Act, the RBI will be enabled to remove and appoint the director of an NBFC’s board. This provision ensures that the RBI can act swiftly and directly to counter any malpractices in an NBFC’s operations.
Provisions for Amalgamation, Splitting, and Reconstruction of NBFCs
Furthermore, the new amendments compel the RBI to establish schemes for amalgamating, splitting, and reconstructing an NBFC. This facilitates the resolution of financially struggling NBFCs, either through merger or by dividing them into viable and non-viable units referred to as bridge institutions.
| Amendment | Implication |
|---|---|
| Expansion of RBI Autonomy | Enables the RBI to supersede an NBFC’s board when necessary. |
| RBI’s Increased Control Over NBFC Boards | Allows the RBI to remove and appoint the director of an NBFC’s board. |
| Provisions for Amalgamation, Splitting and Reconstruction of NBFCs | Facilitates resolution of financially struggling NBFCs via merger or partitioning. |
Auditor Removal and Group Company Audit
The revised Act will empower the RBI to remove auditors, call for an audit of any group company of an NBFC, and exercise control over the compensation of senior management. These changes offer more hands-on control to the RBI over key aspects of an NBFC’s operations and management. Further, it acts as a measure to maintain the integrity and financial stability of the banking sector.