Mint Road group proposals seen hurting RNBCs

The operations of residuary non-banking companies (RNBC) would be severely affected if the Reserve Bank of India (RBI) implemented the proposals of its working group, which has suggested RNBCs have to convert themselves into one of the definable categories of NBFCs within a stipulated time with a cap on deposit mobilisation.

Peerless General Finance & Investment Co Ltd (PGFI) has submitted its response largely disagreeing with the approach of the working group, chairman of the board, D N Ghosh told shareholders at its 71st annual general meeting last week.

The RBI has already introduced restrictions on the investment pattern to phase out the discretionary category limit of 20 per cent of deposit liability totally by March 2006, besides further restrictions like increasing the risk weight assigned to investment by NBFCs and RNBCs in fixed deposits and certificates of deposits and bonds of public financial institutions (PFIs) to 100 per cent from the present 20 per cent.

In the present volatile capital market, with interest on fixed income yielding investments from approved categories having fallen steadily over the years, the stipulations would put extreme pressure on margins and capital adequacy ratio at PGFI which was committed to returns to certificate holders.

"Peerless will appropriately make representation to RBI for suitable relaxation and dispensation", said Ghosh.

Ghosh suggested RBI should, in view of the prevalent falling interest rates in the financial market, consider abolishing the floor rate of interest in line with the policy of moving away from the administered interest rate regime.

If risk weights of bonds issued by government-backed PFIs were to be reckoned as 100 per cent, resources would become costlier and the existing deposit schemes would tend to become unviable, Ghosh warned.