New norms to help shady NBFCs

MUMBAI, Dec 19: The Reserve Bank of India RBI has taken a decision which will herald the re-entry of fly-by-night operators into the fi...

MUMBAI, Dec 19: The Reserve Bank of India RBI has taken a decision which will herald the re-entry of fly-by-night operators into the financial services sector. The relaxation in the guidelines for mobilising public deposits by non-banking finance companies NBFCs has come sooner than expected 8211; one year after the collapse of CRB Capital Markets and closure of hundreds of NBFCs.

What has surprised financial experts is the decision of the regulatory body to allow NBFCs to raise public deposits without a credit rating. The RBI had made compulsory rating for NBFCs which raise deposits from the public after the collapse of the CRB and many other NBFCs last year. The relaxation on Friday 8211; after intense lobbying by NBFCs 8211; has come at a time when the list of NBFCs, which collected deposits from the public and later found unable to repay the funds, is expanding. Instead of tightening the screws on shady companies, the norms were relaxed by the government and the RBI.

Investors had been rulling from pillar topost to recover funds from NBFCs like JVG, Helios, Prudential Capital, Dalal Street and so on. The RBI had banned these companies from raising deposits. Some of these NBFCs, including CRB Capital Markets, had managed to get good rating 8212; even double A and triple A ratings 8211; from credit rating agencies. This situation forced the RBI to allow only NBFCs with a credit rating of above A8217; to raise fixed deposits last year.

8220;The RBI has now thrown open the doors of deposit mobilisation for unrated companies. This is a dangerous situation and it can lead to more scams like CRB. It is not understandable why unrated and weak companies should be allowed to tap public funds,8221; said the former chief of a financial institution. A credit rating below A8217; is not considered as a good rating.

On top of this, rating agencies have been downgrading NBFCs in the last one year. Most of the NBFCs, including the top ones were downgraded due to the poor asset quality and weak returns. Quite a few NBFCs are even in the defaultlist. Is it prudent on the part of the regulators to allow NBFCs with below investment-grade rating to raise funds from investors?

Financial experts are of the view that NBFCs are likely to misuse the freedom once again. 8220;History is likely to repeat itself. During the 1996-97 period, finance companies were falling over another to offer maximum interest rates. In several cases the interest charges went up to 22-24 per cent. After collecting money from the public these NBFCs defaulted on their commitments,8221; said the promoter of a defunct finance company. With the RBI now allowing unrated and below investment grade companies to raise deposits, chances are that such companies will offer higher interest rates and lure investors. Thereafter, these companies will sink8217; with investors money.

It may be recalled that following the absolute freedom given by the RBI/Finance Ministry as per the report submitted by A C Shah committee, 40,000 NBFCs were born in a span of few years time 8211; CRB Capital Markets ofBhansali was only one of them. Domestic saving was diverted for speculative business instead of the real sectors for production purposes causing the current slowdown.

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In India, NBFCs use fixed deposits to fund their long-term assets which is not a healthy trend. There is no wonder that several NBFCs are stuck with huge non-performing assets NPAs and some had opted for the merger route to get out of the crisis.Most of the finance companies were floated with the sole intention of leverage their borrowing capacities and raising deposits from the public to fund shady business activities.

A similar exercise also took place in the plantation sector. Several plantation companies which collected money from the public later diverted the funds and these firms floated fresh deposit schemes to repay back maturing deposits. SEBI has now banned floating new plantation schemes without a rating.

Not satisfied with Friday8217;s relaxation in guidelines, NBFCs are now demanding further easing of the norms. It is to be seenwhether the RBI and the government will again succumb to the lobbying of finance companies and fully roll back whatever is left out.