NBFC norms for banks in the offing

CREDIT POLICY RUN-UP

The Reserve Bank of India (RBI), in its second quarterly review of 2005-06 monetary policy on October 25, is likely to announce guidelines to prevent banks from setting up NBFC subsidiaries to skirt banking regulations.

A comprehensive policy is aimed at putting in place a transparent system for licensing process of the setting up of NBFCs by banks. At present, the apex bank decides on such applications on a case by case basis.

"The comprehensive policy is expected to put an end to banks getting into businesses which are a taboo for them," sources said.

A senior official with a public sector bank said, "RBI is expected to come out with guidelines on banks floating NBFCs. Conventionally, foreign banks have followed the NBFC route to compete with their local peers, given the rigid regulatory environment. But that does not give any reason for private sector banks to adopt this route. This is a clear case of regulatory arbitrage and the regulator will tackle it in the near future."

RBI recently rejected applications from HDFC Bank and IndusInd Bank to set up NBFCs for capital market operations. Many other banks' applications are also pending with the banking regulator. These include that of BNP Paribas, HSBC, Centurion Bank, UTI Bank and Bank of America.

There are several restrictions on banks' exposures to the capital market. RBI has capped banks' lending to brokers at Rs 20 lakh per broker, which is a hurdle in cases where banks have better ties with certain stock brokers.

Banks active in debt syndication also feel the necessity of a subsidiary as holding of unlisted securities is capped at 10 per cent of non-SLR (statutory liquidity ratio) securities.

Banks' non-SLR investments are very low and linking investments in unlisted securities to them hinders smooth operation of syndication business.

A senior official of a private sector bank said, "As of now, NBFCs are not as regulated as banks are. However, RBI is reviewing the existing structure as banks are capitalising on this. Some banks were keen to float NBFCs for capital market-related activity. However, RBI did not approve since the stock market is volatile now. The regulator, otherwise, is not averse to banks' floating subsidiaries targeting safe sectors."