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Why is the Supreme Court’s decision on NBFC regulation such a relief for the industry?

The RBI’s and state governments’ dual regulation of NBFCs had caused a lot of confusion in the business. The microfinance issue in Andhra Pradesh is one example.

Typical illustration

The Supreme Court declared on May 10 that state moneylending laws passed by the governments of Kerala and Gujarat will not apply to non-banking finance firms (NBFCs) regulated by the Reserve Bank of India (RBI). This is an important decision that will have ramifications for other state governments in similar circumstances.

In the case of Nedumpilli Finance Company vs. State of Kerala and numerous other civil appeals, the court ruled that Chapter IIIB (RBI regulation for NBFCs) constitutes a full code in and of itself in terms of NBFC regulation.

Furthermore, there is an unresolvable conflict between the RBI Act and the Moneylenders Act. Furthermore, the court stated that section 45Q of the RBI Act supersedes the Moneylenders Act, meaning that the state has no authority to control NBFC moneylending.

“…to say that RBI has no say in such a matter of vital interest will strike at the very root of the statutory control vested in RBI,” the court stated

What does this imply?

The court decision means that only the RBI has the authority to regulate NBFCs, preventing parallel regulation. The Supreme Court stated in its order that provision 45Q allows Chapter IIIB to supersede other statutes.

As a result, the states of Gujarat and Kerala cannot claim that their laws are in addition to Chapter III­B’s requirements. The court stated that NBFCs controlled by the RBI play an important role in the country’s financial health.

The court further stated that the RBI has the authority to supersede an NBFC’s board of directors and even to wound up an NBFC.

“Thus the supervision and regulation of NBFCs by the RBI is from the time of birth till the time of death,” the court observed.

“If a statutory enactment which provides for such  type of control and supervision is not a complete code in itself, we do not know what else could be a complete code.”- the court

The order was hailed by industry experts.

“This settles a long pending issue. The order has come as a relief for the industry.”- Raman Agarwal, director and spokesperson for Financial Industry Development Council, an industry lobby.

“The order clearly shows that the state has no power to regulate working NBFCs,” said Agarwal.

What is the significance of the decision?

The decision is significant since the RBI’s battle with state governments over key areas of NBFC regulation has caused quite a stir in the past, when state governments intervened in NBFC activities using the state moneylending act.

Dual regulation, in which state governments and the RBI simultaneously function as regulators for lending companies, has caused regulatory ambiguity in numerous states, including Gujarat and Kerala. This void allowed local politicians to interfere with NBFC activities.

One example is the microfinance crisis in Andhra Pradesh in 2010, when the state government enacted punitive legislation against MFIs, including those functioning as NBFCs.

The state put limitations on all such institutions, including NBFCs, eventually causing the industry to fail and many businesses to close.

Similar issues can be avoided in the future now that the Supreme Court has clarified the regulatory component of NBFCs.

“Justice delayed is justice denied, as they took 10 years to give this verdict, whatever damage that had to happen might have already happened,” Pradakshina Fintech’s managing director and chief executive, Kishor Kumar Puli, stated. Puli previously led Trident Microfinance, which was forced to close during the Andhra Pradesh crisis.

“Similar case of Andhra Pradesh MFI Act is still pending at the Hyderabad high court. Hopefully, it should protect NBFCs from such draconian Acts of state government,” Puli said.

Sarah Bisht

Hey! My name is Sarah and I am 14  years old. My pronouns are she/her. I study in class 9th. I am a podcaster, blogger, writer, and producer. I founded a media company called TriPod Media in 2020, which currently produces two podcasts, Word Affinity, which is a podcast hosted and produced by me, and Storytime With Kabeer, which is a podcast hosted by me and narrated by my brother. I am a MUNer and have won many accolades in various committees. I am also a writer and blogger, having published my work on many platforms. I like reading classic and dystopian novels, listening to podcasts about science, and perusing books about investing and managing money. I have a website where I write about my favourite authors, books, issues that need to be talked about and other things. I strive to help other young aspiring authors to achieve their dreams and write! You can go to my website and message me to talk about collaborating with me, about a writing job or working with TriPod Media!

Sarah Bisht
Sarah Bishthttps://bit.ly/3hzm0kc
Hey! My name is Sarah and I am 14  years old. My pronouns are she/her. I study in class 9th. I am a podcaster, blogger, writer, and producer. I founded a media company called TriPod Media in 2020, which currently produces two podcasts, Word Affinity, which is a podcast hosted and produced by me, and Storytime With Kabeer, which is a podcast hosted by me and narrated by my brother. I am a MUNer and have won many accolades in various committees. I am also a writer and blogger, having published my work on many platforms. I like reading classic and dystopian novels, listening to podcasts about science, and perusing books about investing and managing money. I have a website where I write about my favourite authors, books, issues that need to be talked about and other things. I strive to help other young aspiring authors to achieve their dreams and write! You can go to my website and message me to talk about collaborating with me, about a writing job or working with TriPod Media!

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