REC opposes NBFC norms

Rural Electrification Corporation (REC), a government-controlled non-banking finance company (NBFC) for the power sector, has opposed the central bank’s new discussion paper on draft guidelines for NBFCs. Seeking that the status quo on NBFC norms be maintained, the lender has asked the ministry of power to intervene on its behalf on the crucial issues of higher capital adequacy ratio for Tier-I capital and on tightening the exposure limit.

REC last week wrote a letter to the ministry on the norms proposed by a working group of the Reserve Bank of India (RBI). The company is also in the process of seeking clarification from RBI on the draft banking guidelines.

REC and Power Finance Corporation, another state-run lender for the sector, had planned to promote a bank but the draft RBI guidelines restrict setting up of banks to private promoters. “There are two proposals we are opposing. First, the criteria for eligibility of only promoters who are from private sector, and second, the condition of transfer of assets to the bank. These two conditions are not favourable to REC because we do not want to convert to a bank,” chairman and managing director H D Khunteta told Business Standard.

Khunteta said the company’s spread and net interest margins were far better than that of a bank. “If today we have to convert to bank, we will have to comply with the statutory liquidity ratio and cash reserve ratio. Besides, we are only in one sector but we will have to provide funds to other sectors,” he said.

The proposed norms envisage that NBFCs transfer assets and merger with banks but Khunteta said their objective was to promote banks by joining hands with foreign banks or an infrastructure finance company with rural network to enhance shareholder value. “Now, clarification from the government is required whether a public sector undertaking (PSU) can become a promoter.” He said the basic nature of the bank could remain in the private sector, with PSUs investing only 26 or 49 per cent of equity.

Besides, deferring transfer of assets should be allowed.

The RBI working group on NBFCs had earlier proposed that the capital adequacy ratio should be 12 per cent for Tier I capital against 7.5 per cent at present. Second, it has suggested the exposure limit be reduced by five per cent. There are some advantages that the proposed norms offer like the tax advantage which is available at five per cent can be claimed at 7.5 per cent. “Last week, we had written a letter to the Ministry of Power for onward submission to RBI to follow the current guidelines.”

On classifying loans as non-performing assets (NPAs), REC wants a two-quarter norm be followed. The logic is that when banks charge on a monthly basis, they are allowed two months. Similarly, when NBFCs charge on a quarterly basis, they should be allowed the leeway of two quarters or 180 days. The current NPA norms deem an asset bad when a borrower does not pay for 180 days.

The RBI working group had recommended tighter norms for NBFCs to improve regulatory supervision and reduce the difference between these companies and banks, especially in terms of how they classify and recover loans. The working group, headed by former RBI deputy governor Usha Thorat, had released the discussion paper, to be finalised by September-end.

While the new asset classification norms may see higher NPAs for some NBFCs, the group wants to allow these companies to recover bad assets by bringing them under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarefaesi) Act of 2002. NBFCs will be given three years to take their Tier-I capital adequacy to 12 per cent.