NBFCs on the verge of a major shakeout, says Shah

He said NBFCs played a complimentary role to the banking sector by filling up gaps in the demand for credit and mobilising the savings of the community. “After the CRB scam the NBFCs are at cross roads. The most critical problem confronting the industry was liquidity. Deposits have disappeared, rate of renewal has fallen drastically and premature withdrawals have been heavy. The need of the hour is a well thought out damage control and confidence building exercise,” he said.

He outlined the need for an entry barrier, deposit insurance and evolving of a definitive norms for rating NBFCs through tripartite meeting among the NBFCs, credit rating agencies and RBI. He called for a comprehensive approach to the problems involving protection of depositors money. It should avoid a piece-meal approach. He added that the NBFCs were afraid that the regulatory authority would impose more and more controls such as higher capital adequacy norms, dual rating, etc.

Speaking on the occasion, S A Dave, former chairman, Unit Trust of India said the future of NBFCs was clearly related to the future of the banking industry. NBFCs thrive in areas where the banking sector could not perform satisfactorily. “One CRB scam cannot end this segment,” he said.

Dave said the share of NBFCs in deposit mobilisation would double in the next few years. He called on the NBFCs to do a little work to instill confidence in the minds of the investors. Stiffer disclosure norms and compulsory credit rating could go a long way in restoring public faith, he added.

NBFCs must come together and form a self-regulatory body to face the emerging challenges in the finance industry in the aftermath of the CRB scam, Dave said.

“There is lack of rapport even among the NBFCs and also between the companies and the RBI. A self-regulatory body will help NBFCs overcome these hurdles and present their case better to the RBI,” Dave said.

He said it would be wrong on the part of NBFCs to object to penal action against certain companies which indulged in wrongdoing, as “action must be taken where it is necessary.”

R Thyagarajan, chairman, Shriram group of companies, stressed the need for a cost effective regulation. Excessive regulation would mean cost to both the regulatory authority and the finance company, he added. He also called for selective monitoring of the NBFCs with thrust given to vital areas. He said deposit insurance would do more harm than benefit and would be very difficult to implement a cost effective scheme.

Other speakers included K S Shere, chairperson of the RBI appointed Committee for New Instrumentality for NBFCs, Tarachand Dugar of Dugar group of companies and P S Balasubramanium of Investment Trust of India.