Last week, RBI released a discussion paper that proposed a regulatory approach at scale related to the contribution to systemic risk of shadow lenders.

In a report released Monday, Moody’s Investors Service said the proposal would commit the 25 to 30 largest NBFCs to bank-like regulations regarding capital, credit concentration and governance.

“If implemented, the regulations would make companies more resilient to credit shocks. However, the proposals do not address the financing and liquidity of NBFC, the industry’s main credit weakness,” Moody’s said.

The proposed new regulations would result in widely harmonized rules between banks and NBFCs on capital and leverage, which would reduce regulatory arbitrage opportunities for NBFCs against banks in their lending decisions, he said. he declares.

However, changes are being proposed to NBFC’s current lighter liquidity rules, according to the report.

Banks are subject to strict regulations on maintaining a minimum cash reserve ratio and statutory liquidity reserve, which are not imposed on NBFCs, he said.

“This means that the proposal does not address the main weakness of NBFCs and that the sector will continue to pose risks to the quality of banks’ assets, as banks are the main lenders of NBFCs,” the report said.

The document proposed the regulatory framework for NBFC based on a four-layer base layer (NBFC-BL), an intermediate layer (NBFC-ML), a top layer (NBFC-UL) and a top layer.

“If implemented, the 25-30 largest NBFCs will be classified as NBFC-UL and will have to maintain a minimum level 1 (CET1) common stock ratio of 9%, compared to 8% for banks,” Moody’s said.

NBFCs will need board approved policies to focus on riskier sectors such as real estate, which has been a source of asset quality issues for NBFCs, he said.

Moody’s expects the top rated NBFCs to be classified as NBFC-UL. The new standards don’t provide much incentive for NBFCs to convert to banks, which the regulator envisioned through proposed changes to bank ownership regulations in November 2020, according to the report.

The banking regulator is proposing to keep the top layer of the NBFC empty as a first step, but will move companies into that category if it sees high credit risk in those companies, he said.

“These NBFCs will be subject to more stringent oversight similar to the rapid remedies framework for banks,” the report said.