Non-deposit taking NBFCs may come under prudential ambit

The Reserve Bank of India (RBI) is likely to bring the non-deposit taking non-banking financial arms (NBFCs) of foreign banks under the prudential norms ambit and bring them under its supervisory vigilance.

This move is seen as a means towards investor protection since most of the NBFCs will be raising funds from the domestic market and lending to retail sector.

According to banking sources, these NBFCs are likely to be asked to abide by the capital adequacy norms and adhere to the concentration ratio.

The concentration ratio at present specifies that the exposure of banks or deposit-taking NBFCs cannot exceed 15 per cent of their total lending portfolio to a single borrower and 40 per cent in the case of group lending.

At present, the RBI has no control over NBFCs, which are non-deposit taking. These NBFCs are also likely to be asked to furnish their financial statements at regular intervals to the central bank.

Recently, Standard Chartered Bank set up a 100 per cent NBFC "" Standard Chartered Investments and Loans (India) Ltd (SCIL), to be capitalised at $50 million "" in order to enable the foreign bank to raise funds from the domestic market without the hassles of conforming to RBI's norms on priority sector lending and statutory liquidity ratio.

This move assumes importance in light of the recent government notification that allows foreign banks to convert their branch licences into wholly-owned subsidiaries.

SCIL, the NBFC arm of the foreign bank, will raise Rs 1,000 crore this year from the market. Foreign banks today are no longer allowed to tap domestic funding from the money market unless they convert themselves into a subsidiary.

Currently all foreign banks operate in the country on a branch licence basis. Should they set themselves up as a subsidiary banks would then be able to raise funds from the money market, but would then need to conform with RBI norms as that pertaining to domestic banks. Further, StanChart's NBFC will supplement the bank's business, as it will book new business under this arm.

The NBFC will supplement the bank's operations both in terms of funding base as it can access the domestic capital market plus offer good investment opportunities for its corporate customers. In the first year of operations, the balance sheet size is expected to cross Rs 1,000-1,200 crore.