Power sector vulnerabilities identified as a significant systemic risk for Non-Banking Financial Companies (NBFCs) by the International Monetary Fund (IMF)
India's Regulatory Framework for State-Owned NBFCs Addresses Systemic Risks
As India moves towards 2025, the regulatory framework for state-owned Non-Banking Financial Companies (NBFCs) is undergoing significant changes to address systemic risks, particularly those stemming from exposure to stressed sectors such as the power industry.
The Reserve Bank of India (RBI), the primary regulator, is proposing several reforms aimed at reducing overlapping subsidiaries among NBFCs, enhancing transparency, and mitigating concentration of risks.
Consolidation and Structural Streamlining
The RBI is proposing rules that would require NBFCs to reduce overlapping subsidiaries. This aims to simplify complex corporate structures that can obscure risk concentrations, including those from troubled sectors like power. By eliminating redundant subsidiaries, the RBI hopes to prevent risk contagion within groups where parent and subsidiary companies engage in similar lending, which could amplify the impact of defaults in stressed sectors.
Alignment of Norms with Banks
Recent reforms include aligning NBFC regulatory frameworks with those applicable to banks. This includes treatment of exposures for capital requirements that factor in sectoral risks. The RBI is also tightening regulations to enhance overall sector resilience, including clear guidelines on exposure limits and risk governance.
Mitigating Systemic Risks
Following episodes of distress in power and other infrastructure sectors affecting NBFC asset quality, the RBI is shifting its approach towards outcome-based regulation to strengthen micro and macroprudential oversight of systemic risks posed by NBFCs.
Sectoral Exposure Monitoring
While explicit public details about new exposure caps specifically for the power sector are limited in the available 2025 sources, the regulatory focus on improving disclosure, transparency, and controlling inter-company lending within NBFC groups implicitly addresses potential systemic risk accumulation in vulnerable sectors such as power.
Digital and Innovation-Driven Reforms
The RBI is also allowing NBFCs to expand their role in financial inclusion, fintech, and digital lending, under a refined regulatory regime balancing innovation with risk controls. This indirect evolution may reshape how NBFC risk profiles are managed, including exposures to infrastructure sectors.
In addition to the RBI's efforts, the International Monetary Fund (IMF) has identified major systemic risks with NBFCs in India. The IMF highlights the importance of establishing a comprehensive resolution regime, aligning the regulations of state-owned NBFCs with those of the private sector, and implementing broader macroprudential policy. The IMF also suggests that IRDAI should be given legal powers for starting group supervision and that the central bank should be ready to expand crisis-time liquidity policy options to include tools more suited for systemic liquidity events among NBFCs and markets.
Despite the IMF not naming specific NBFCs, it emphasizes that additional regulatory measures are essential. The IMF's concerns stem from NBFCs' concentrated exposures, particularly to the power sector, which could lead to systemic issues through linkages with banks, corporate bond markets, and mutual funds.
In summary, current regulations and proposed reforms for state-owned NBFCs in India centre on reducing subsidiary overlaps, aligning risk management standards with banks, enhancing transparency, and controlling sectoral credit exposure to mitigate systemic risks from the power sector and other stressed industries. These steps reflect the RBI’s broader regulatory strategy to safeguard financial stability while ensuring NBFCs continue to support the economy’s credit needs.
%20by%20the%20International%20Monetary%20Fund%20(IMF)){kind=link}