RBI red flags non-banks financial companies

The RBI has red flagged the non-banking financial companies in its annual report, as it observed that while the balance sheets of the shadow banks have expanded, their asset quality has deteriorated. The regulators said that some of these entities pose a potential threat to financial stability as their size has increased due to higher risk appetite.

The balance sheet of non-banking financial companies NBFCs expanded in 2021 -- 22 up to December 2021 but asset quality in the sector deteriorated. Capital cushions showed an improvement, according to the annual report.

The report said that the contribution to supporting real economic activity and acting as a supplemental channel of credit intermediation alongside banks is well recognised.

The report said that risk appetite has contributed to their size, complexity, and interconnectedness over time, making some of the entities systemically significant that pose a potential threat to financial stability.

The report said that shadow banks and cooperative banks UCBs will have to be mindful of frailties, wherever they exist, in their balance sheets and ensure robust asset-liability management, as well as improve the quality of their credit portfolios.

The report said that the continued attention to their financial health is warranted by the view of financial stability because of the significant share of funding absorbed by the system.

RBI has issued guidelines extending the prompt corrective action PCA framework for NBFCs.