RBI norms puts NBFCs' survival in question

The regulatory arbitrage that non-banking finance companies were enjoying over banks is going to be over by 2018 following new norms from RBI

The regulatory arbitrage that non-banking finance companies were enjoying over banks is going to be over by 2018 following new norms announced Monday by Reserve Bank of India (RBI).

 

NBFCs will now have to make provisioning for bad loan and standard assets in line with what banks are doing. Banks declare an account non-performing if the borrower fails to repay interest or principle for 90 days. Until now, NBFCs were allowed to classify NPA after an account was overdue for 6-12 months. The provision for standard assets has also been hiked to 0.40%.

 

Only a handful of NBFCs – 254 out of 12000 odd entities – accept public deposits. So, even if NBFCs are not subjected to cash reserve ratio and statutory liquidity ratio – which banks need to maintain – the advantage is limited to only a few. Moreover, six larger deposit taking NBFCs, constituting just about 2.8% of the total number of NBFCs-D, mobilised about 95% of total deposits of the NBFCs-D at end-March 2013 – RBI data shows.

 

RBI has not allowed any NBFC to accept public deposits recently and there is no indication that the stance will change anytime soon.

 

NBFC rely heavily on banks funds and unsecured borrowing for their growth. Unsecured borrowing, which constitutes almost half of its total borrowing – comes at a higher cost. Borrowing from banks is also not less than 10%. Overall, the borrowing cost for NBFCs are anywhere between 10 to 12%.

 

Banks on the other hand, which are allowed to accept public deposits, have a cost of fund of 6-6.5% mainly due to their access to savings and current account deposits which are low cost in nature. 

 

As a result of the new norms, the apparent benefit of being a NBFC as opposed to a bank will no longer be there but still they will not have access to low cost deposits. 

 

It is clear that the central bank does not want shadow banking entities to continue – a lesson it learnt from the global financial crisis of 2008.

 

Across the world, shadow banking activities came under the scanner following the global financial crisis of 2008, particularly in developed nations where these entities played a more active role than in India. Shadow banks are entities that undertake credit intermediation very similar to banks, but escape the stringent regulation that the latter are subjected to. The modus operandi of such entities lacks transparency with respect to business model, leverage, and ownership which makes it difficult to regulate them.

 

A 2012 report by Financial Stability Board suggests the largest relative presence of a shadow banking system is in Netherlands (45%) followed by USA and Hong Kong – both around 35%. 

 

The situation is different in India where the landscape is dominated by banks that account for 60% of financial assets. According to data compiled by Reserve Bank of India, the assets of entire “other financial intermediaries” (OFIs) accounted for approximately 24% of bank assets as on March 31, 2012, whereas the assets of the NBFC sector alone accounted for 12%, which denotes the significance of NBFCs in the shadow banking system. 

 

The issue in India is that of regulatory arbitrage and systemic inter connectedness.

 

RBI has allowed some of the NBFCs to convert themselves into banks during the bank licensing process. The banking sector is highly regulated with stiff entry barriers. During the last round of bank licencing, only 2 applicants were given bank licence out of 26 applicants.

 

RBI has decided to open up the banking system as it will allow niche banks and give on-tap licences to universal banks. It is however not still clear what view the regulator takes in giving universal bank licences to corporate and industrial houses. While they were allowed to apply for licences, none was granted. Most of the NBFCs, however, are owned by large corporate houses. Most of them may not opt for payment bank – which cannot accept public deposit of more than Rs 1 lakh. Regarding small banks, building up scale will is an issue as geographical constraints are imposed.

 

Till the time RBI takes a view on granting universal licences to industrial houses, the fate of NBFCs hang in balance. 

(Manojit Saha is banking editor at Business Standard)