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SC ruling on non-banks removes key regulatory overhang: Crisil

The recent ruling by the Supreme Court that underscored the primacy of the Reserve Bank of India, as the regulator of non-bank financing companies has removed a key overhang on such shadow lenders especially in the matter of the rate of interest they charge borrowers, domestic rating agency said.

“The ruling has effectively reaffirmed regulatory sanctity for NBFCs registered with the RBI as a separate category of lenders, distinct from the traditional moneylenders,” said Krishnan Sitaraman, Senior Director, CRISIL Ratings.

“While the Supreme Court has not specifically commented on the appropriateness of interest rates being charged by NBFCs, it has implicitly stated that the RBI has the jurisdiction and powers to look into the same and is already doing so through the various Regulations, Master Circulars and Master Directions issued by it.”

The ruling is specifically beneficial to gold loan NBFCs and other regulated NBFCs, including NBFC-MFIs, where sensitivity over interest rates is higher, Sitharaman added.

Crisil also said that despite the ruling, NBFCs need to be cautious about the interest rates they charge borrowers, and anything deemed usurious has the potential to be subjected to supervisory scrutiny by the RBI.

The Supreme Court recently put to rest the uncertainty around the applicability of state legislations on non-banking financial companies, by emphasising the primacy of TBI as the supervisor of NBFCs in India.

The legislatures of Kerala and Gujarat had sought to bring NBFCs under the ambit of their respective legislations (the Kerala Money Lenders Act, 1958 and the Gujarat Money-Lenders Act, 2011) to regulate the interest rate charged by moneylenders and protect borrowers.

The Supreme Court held that state enactments have no application to NBFCs registered under the RBI Act, and that the law is clear about the central bank having a supervisory role to oversee the functioning of NBFCs from the time of their birth till the time of their commercial death.

The Supreme Court also said, that while the RBI may not be controlling the rate of interest charged by NBFCs on loans advanced by them, it does have the power to step in to determine policy and issue directions.

It apex court had also observed that while the RBI generally leaves it to the market forces to determine the rate of interest, states cannot take advantage of this to step in and prescribe limits.

“Chapter III B of RBI Act is a complete code in itself,” said Raman Agarwal, spokesperson for FIDC – an NBFC industry body. “There is a clear conflict between RBI Act and the state has no power to regulate moneylending business of NBFCs.”

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