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RBI cracks down on NBFC deposits

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Anindita Dey Mumbai
The Reserve Bank of India (RBI) has started a census of non-banking finance companies (NBFCs), which do not take public deposits (NBFC-NDs), to work out a comprehensive regulation for the sector.
 
While the central bank is mulling various options for regulation, as an immediate measure, the RBI has asked independent directors to be "morally accountable" for the decisions of the boards of such NBFCs as per the corporate governance guidelines of the Securities and Exchange Board of India (Sebi).
 
According to the data available for the sector till date, of the nearly 1,400 NBFC-NDs, about 120 such NBFCs, which have filed their balance sheets, have staggering assets of close to Rs 3,00,000 crore. On the contrary, around 450 deposit-taking NBFCs have an asset base of Rs 6,000 crore.
 
For the regulation of the sector, one of the proposals is to lower the threshold of networth for mandatory reporting to RBI from Rs 100 crore to Rs 1 crore.
 
Further, the NBFC-NDs floated by brokers and investment companies may have to be registered with the RBI irrespective of the networth, as much of their investments make way into the capital market, said banking sources.
 
Secondly, bank finance to the investment companies should be capped at a 3 to 5 per cent in line with the capital market exposure norms for banks.
 
These suggestions are over and above the working group recommendations, which are not very comprehensive, the sources said, adding there is no point in clubbing bank finance to the entire NBFC sector as capital market exposure since all companies do not deal in investments.
 
While commercial papers (CPs) issued by such companies could be clubbed with public deposits, the amount of CPs raised should be capped as in the case of financial institutions and manufacturing companies.
 
While CPs raised by a manufacturing company is linked to the working capital of the firm, FIs could raise resources, including CPs not more than 100 per cent of their net-owned funds.
 
Further, there will be gearing ratio in line with the financial institutions, which specifies a cap on the entire resource mobilisation. As per the existing norms, an FI can raise funds not more than four times the net-owned funds. Further, the CPs need to be rated by credible rating agencies.
 
The central bank is also considering various options for plugging the regulatory arbitrage for foreign banks and new-generation private sector banks, which are acquiring these NBFC-NDs of minimum Rs 25-30 lakh net worth to scuttle the comprehensive procedures for branch licensing.
 
While the central bank proposes stringent scrutiny for foreign funds being invested in the sector through KYC norms, it also feels that there could be stricter vigilance over the use of funds and purpose of floating NBFC by such foreign entities.
 
As for the NBFCs backed by foreign banks operating in India, the central bank may make all banking norms, including the new Basel-II, applicable to such NBFCs.
 
Similarly, all banking norms may apply to NBFCs floated by a foreign entity operating in India. Such entities will also be governed by connected lending norms, This means the NBFCs will be restricted from lending to their related party with the same parent operating in India.

 
 

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First Published: Oct 11 2006 | 12:00 AM IST

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