Uncovered NBFCs get playing rules

RBI guidelines aimed at checking unbridled growth of non-banking finance companies.

The Reserve Bank of India (RBI) today announced guidelines to put a brake on the unbridled growth of non-banking finance companies (NBFCs).

It has, with immediate effect, capped borrowings by systemically important NBFCs not taking public deposits (NBFCs-ND), introduced a capital adequacy requirement, applied exposure norms and decided to regulate NBFCs promoted by parents of foreign banks operating in India on a consolidated basis.

Systemically important NBFCs-ND are those with asset size of Rs 100 crore. The list includes GE Money, Citifinancial, Reliance Capital and Bajaj Capital.

The RBI also barred all banks "" domestic as well as foreign "" from holding more than 10 per cent of the paid-up equity capital of an NBFC that accepts deposits.

Following this, DBS Bank will be required to pare its stake in Cholamandalam DBS Finance.

Similarly, Citibank will now be required to include the activities of its NBFC arm, Citifinancials, in the consolidated prudential returns because the RBI has decided to treat the wholly owned and majority-owned NBFCs of foreign banks as part of their banking operations in India and has brought them under the ambit of consolidated supervision.

In the absence of liberal branch licensing norms, some foreign banks have been using their NBFC arms for expansion. DBS can approach the RBI within two months with a concrete plan to bring down its stake in the south-based NBFC within a specified timeframe.

The RBI has also restricted a bank's exposure to a single NBFC at 5 per cent of its net worth and aggregate exposure to all NBFCs at 40 per cent of net worth.

The RBI has capped the borrowings of systemically important NBFCs-ND to 10 times net owned funds and made applicable minimum capital adequacy of 10 per cent. The NBFCs-NDs till now were not subjected to any capital adequacy norms.

The system of consolidated regulatory framework till now was applicable to only those NBFCs set up by an Indian banking group.

Now, the NBFCs promoted by foreign banks operating in India will come under the framework of a consolidated accounting system that will cover capital adequacy, single and group exposure and capital market exposure norms.

"These regulatory actions have been taken in the light of concerns that arise out of the divergent regulatory requirements for various aspects of functioning of banks and NBFCs and keeping in view the broad principles of the proposed revision in the regulatory framework," an RBI release said.

NBFCs set up by foreign entities will be allowed to undertake only the permitted activities under the automatic foreign direct investment (FDI) route. Diversification into any other activity will now require prior approval of the Foreign Investment Promotion Board (FIPB).

Similarly, a company that has entered into an area permitted under the FDI policy (such as software) and seeks to diversify into the NBFC sector will also have to ensure compliance with the minimum capitalisation norms and other regulations.

The systematically important NBFCs-ND will not be allowed to lend to any single borrower more than 15 per cent of its owned funds. The exposure to any single group of borrowers is capped at 25 per cent of owned funds.

These entities cannot invest in shares of another company, except insurance companies, exceeding 15 per cent of owned funds and in the shares of a single group of companies exceeding 25 per cent of its owned funds. So, Reliance Capital will not be required to pare its holding in its insurance outfits.

Such NBFCs cannot lend and invest more than 25 per cent of owned funds to a single party and 40 per cent of owned funds to a single group of parties.