India is a bank-dominated financial system with most of the financial assets belonging to the banking sector. However, it is yet to match the size and outreach of banking sectors as prevailing in various other emerging economies. Even after 20 years of liberalisation, close to 70% of the banking sector assets belong to Public Sector Banks (PSBs). The interesting development, however, has been the rise in the popularity of non-deposit taking NBFCs (NBFC-ND) as sources of credit. While the size of the NBFC sector is still relatively small compared to that of banks, these entities have gained market share and are the predominant source of credit in certain niche segments. In this paper, we discuss the role of non-deposit taking NBFCs in the Indian system as credit intermediaries and the regulatory regime that applies to these entities. Specifically, we reflect on the existing micro-prudential regulations that apply to NBFC-ND and highlight that the current framework violates the principle of institutional neutrality of regulation. With regulatory capital for poorly performing banks set lower than relatively well-performing NBFCs, the current regulatory regime seems imbalanced in its application of prudential requirements. The paper concludes with a set of recommendations to re-design the microprudential regulatory framework of non-deposit taking NBFCs in India.
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