expansion of business opportunities. the ecosystem created under the account aggregator ( aa ) framework is yet another example of proactive regulation in the technology - intense activities. the aa framework has ushered in the required framework for safe, secure and consent - based sharing of information on financial assets of a customer. the critical regulatory aspect to be noted here is that the account aggregator does not store or view the data passing through it, thereby leaving no scope for any perverse incentive to abuse / misuse the financial data. let me also emphasize that the rbi has been flexible in according registered nbfcs to be completely app - based in financial intermediation. ( iv ). the rbi revised the regulatory framework under the principles of proportionality for core investment companies ( cics ) with transparency and disclosures being the focus of the revised regulations. the learnings from failure of a large nbfc - a core investment company prompted this regulatory renovation. large aggregate leverage at the group level aided by complex, multi - layered ownership structures were found to be nurturing the seeds of financial instability and vulnerability. further, the aggregate risk view was missing at the holding company level. the revised regulatory framework tries to plug regulatory gaps in critical areas in respect of cics. ( v ). taking over the regulation of housing finance companies ( hfcs ) is yet another significant move. changes in the regulatory framework of hfcs have been issued after wide public consultations. the idea is to treat hfcs as a category of nbfc and bring about harmonisation of regulations while allowing hfcs to maintain their unique characteristics and allow them to transition to the revised regulations over a period of time, that is in a gradual manner, to make it least disruptive for the rest of the financial sector. 11. with the growth in size and interconnectedness, nbfcs have increasingly become systemically significant and the prudential regulations for nbfc sector have evolved to give greater focus to the theme of financial stability. however, let ’ s not forget that regulation - light structure of nbfcs has enabled the flexibility enjoyed by them. this flexibility is the primary advantage of nbfcs over banks, enabling them to serve the last mile of financial intermediation. therefore, it is imperative to strike a balance between regulating the nbfcs more tightly and the need to provide them the required flexibility. this will remain the cornerstone while we imagine the future of regulation for nbfcs. the future principle of

were contributing significantly to the last mile credit delivery, also got impacted as their funding sources got further squeezed. the reserve bank acted in a swift and proactive manner to improve access to funding and liquidity by its monetary policy and liquidity measures and resultantly, the cost of funds for nbfcs and hfcs has reduced substantially for all rating categories ( chart - 2 ). chart 2 : funding cost 3 - month commercial papers ( cp ) weighted average yield % yield july october january april july hfc source : rbi staff calculations october january nbfc - pvt. april july october 7. it is important to recognize that challenges faced by some of the nbfcs were reflective of inherent fragilities. as financial markets started differentiating between strong / well managed nbfcs and those having perceptible weaknesses, market discipline started to play out - entities with asset - liability mismatches or asset quality concerns faced constraints on market access. rbi, in response, took several calibrated steps to channel credit flow into the nbfc sector and improve the sector ’ s long - term resilience. 8. as the sector was slowly inching towards normalcy ( as can be seen from table - 1 below ), the outbreak of covid - 19 and disruptions in economic activity due to lockdowns led to building up of huge stress in the financial system. while the entire financial system was affected, the impact was significantly greater on nbfcs due to their underlying business models, thereby straining their profitability. table 1 : profitability of nbfc sector ( deposit taking and ndsi ) ( amount in rs. crore ) profitability parameters march 2017 march 2018 march 2019 march 2020 net profit ( rs. crore ) 31, 923 42, 434 17, 460 41, 257 annualised roa ( % ) 1. 5 1. 6 0. 6 1. 2 annualised roe ( % ) 6. 3 6. 8 2. 4 5. 1 data source - supervisory returns, rbi the regulatory approach 9. the regulatory approach of the reserve bank has adapted to the increase in complexity of the entities within the nbfc sector as well as the growing significance of nbfcs within the financial sector. the core principles of nbfcs regulation, however, has remained intact, i. e., - a ) protection of depositors ( in case of deposit - accepting companies ) and customers ; and, b ) preserving financial stability