Sahara, Peerless get RBI breather

RNBCs given more time to meet prudential norms.

The Reserve Bank of India (RBI) will give residuary non-banking companies (RNBCs) some more time to comply with prudential norm of investing 100 per cent of their public deposits in RBI-approved securities. The original deadline expires on March 31.

The decision was taken at a RBI board meeting. "The RNBCs will be given some time and they will be required to give an undertaking on conforming to the prudential norms to the central bank," banking sources said.

The RBI decision will benefit Sahara India Financial Corporation Peerless General Investment, which have huge deposits base. Sahara and Peerless have represented to RBI for granting some leeway for discretionary investment.

The RBI has been continuously monitoring the progress made by these companies in meeting the new norms. Peerless has represented to the regulator a plan to gradually shift towards insurance business.

Prior to 2004, RNBCs were allowed to invest 20 per cent of their deposits at their discretion. However, in June 2004 RBI said the discretion would to be phased out by April1, 2006.

This means the total deposits will be invested in approved securities, which include fixed deposits, certificate of deposit of commercial banks and financial institutions, government securities, bonds, debentures and units of mutual funds and units of debt oriented mutual fund schemes. In other words, the deposits will be put in directed investment rather than in discretionary instruments.

The RBI feared that investments by these companies in risky ventures under the discretionary quota was not in the interest of depositors.

A special audit by external agency, consulting firm KPMG, was conducted last year for both Sahara and Peerless over and above the usual RBI inspection.

In their representation, the RNBCs have asked RBI to relax the investment norms so that a small part of their deposits could be invested in high yielding and profitable instruments under the discretionary limit.

They are of the view that profit margin in their business could not be maintained if 100 per cent of the investments are invested in approved securities.

Maintaining the assured return and also complying with the new norms may also lead to divestment of existing business ventures under distress and incurring losses in the process.