The Reserve Bank of India (RBI) noticed that Non-Banking Financial Companies (NBFCs) had faced reputation loss due to the failure of large entities in recent times. Speaking at an event, Deputy Governor M. Rajeshwar Rao said that it was necessary to gain trust in these crucial entities.
“The status of the non-banking financial sector has been depressed in recent times by failure of certain entities due to personal factors. Therefore, we have to restore trust in the sector by making sure that few entities do not generate vulnerabilities which go undetected and create collapses and increase systemic risk through their interlinkages with the financial system,” Rao said.
NBFCs are the most significant net borrowers of funds from the financial system, and banks give a substantial part of the funding to NBFCs and HFCs. Rao said that the failure of any big NBFC or HFC might risk its lenders with the potential to create a poison. “Failure of any big interconnected NBFC can cause disturbance to the operations of the small and mid-sized NBFCs through domino effect by restricting their ability to boost funds,” he said.