The benefits and costs of tighter NBFC regulation

The Reserve Bank of India (RBI) is set to tighten regulation of non-bank financial companies (NBFCs) over the coming weeks. Alongside stricter audits of many smaller lenders, the RBI is likely to require NBFCs to maintain larger buffers of liquid assets. The goal is to improve financial stability – poor governance and undercapitalised balance sheets were key causes of the shadow banking crisis in 2019. One necessary consequence though would be that NBFC lending, which has become increasingly important over recent years, would be constrained. This would add to the list of the reasons to think that the recovery in investment will peter out over the coming quarters.