Clampdown on NBFCs: RBI panel

The central bank is likely to rein in the free run of finance companies.

The central bank is likely to rein in the free run of finance companies. A panel appointed by the Reserve Bank of India RBI has proposed tighter guidelines governing non-banking finance companies in a bid to bring about regulatory convergence and level playing field vis-a-vis banks.

Though banks and NBFCs compete for similar kind of business, the regulations governing them are different now. The RBI move is in the backdrop of increasing interest in setting up of NBFCs in general and by banks and foreign institutions in particular. Besides, there were reports that NBFCs are playing in the capital market.

As per the existing guidelines banks cannot lend against the security of shares, debentures and PSU bonds to an individual, more than Rs 10 lakh Rs 20 lakh if the securities are held in dematerialized form. Such a norm has not been prescribed for the NBFC-D deposit taking. The group has recommended that the guidelines for banks regarding ceiling on finance to individuals may be prescribed for NBFC-D.

The panel has felt that there is a need for looking into the issue of NBFCs availing advantage of raising unlimited amount of CPs commercial papers and playing in capital market. It felt that the following options could be explored: treating commercial paper as a public deposit, introduce capital adequacy ratio requirements for NBFC-ND non-deposit taking to limit the leverage of capital funds and stipulate a gearing ratio i.e. borrowing as a multiple of capital funds as in the case of FIs.

It said the RBI may consider imposing a limit on bank finance that can be extended to a NBFC-ND. This limit could be fixed at a certain percentage of the total capital of the bank. Alternatively, banks may not be permitted to take exposure on NBFCs if NBFCs8217; debt-equity ratio is larger than an acceptable level.

The entire exposure of a bank to the NBFC-ND could be treated as a part of the capital market exposure of the bank. 8220;This may not sound logical. However, the recommendation is based on the premise that the money is fungible. The bank finance availed by the NBFC can be used for business purposes and the 8216;owned funds8217; of the NBFC can be channelised to the capital market,8221; it said.

According to the panel, the RBI may carry out a supervisory review of the banks which have a significant exposure to the NBFCs. 8220;The supervisory review should specifically examine the adequacy of the bank8217;s internal control mechanisms to address the risks undertaken and whether there is a need to mandate additional capital requirements in case the internal controls are found to be inadequate or ineffective,8221; it said.

WHAT IT PROPOSES

8226; Limit on NBFC-D loan against shares

8226; Curbs on NBFCs raising funds via CPs

8226; Limit on bank finance to NBFC-ND

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8226; Bank exposure to NBFC-ND to be treated as market exposure

8226; Review of banks which have big exposure to NBFCs