RBI red flags NBFCs heavy reliance on bank funds

* Central bank warns of systemic vulnerability due to high-risk activities of NBFCs

A working paper of the Reserve Bank of India (RBI) has raised red flags over the high dependability of non-banking finance companies (NBFCs) on the banking system as it would mean systemic vulnerability in the context that NBFCs are involved in higher risk activities vis-à-vis the banking system.

The higher borrowings of NBFCs,especially from the banking system raise some concerns about their liquidity position. More so,if such reliance happens to increase further. The banking systems exposure to NBFCs-D (deposit taking) has considerably increased over the years. These concerns will be further accentuated in case the banks own liquidity position becomes tight at the time of crisis or even at crisis like situation, the RBI paper said.

The consolidated balance sheets of NBFCs (both the categories i.e. deposit taking and non-deposit taking and systemically important companies) revealed that more than 68 per cent of the consolidated balance sheet constitutes borrowings.

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Out of this,30 per cent resources are borrowed from banks and financial institutions as at the end of March 2011. These apart,borrowings by way of debentures issued by the NBFCs constituted around 33 per cent and of which a sizeable portion is subscribed by the banking system. Both of these are on the rise over a period,the RBI paper said.

NBFCs do not have any exposure limit on their capital market related activities unlike the banking system. Moreover compared with regulation of banking sector,NBFCs in general,are less stringently regulated as pointed out by various Committees and Working Groups.

… it needs to be underlined that,the protective cover available for the depositors of banks through the Deposit Insurance and Credit Guarantee Corporation are also absent for the depositors of NBFCs-D, the paper said.

It is intriguing that the total size of the balance sheet of NBFCs-ND-SI (non-deposit taking and sytematically important) reached to Rs 7,30,366 crore as at the end of March 2011,from Rs 1,70,957 crore as at the end of March 2005 growing more than four fold.

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The NBFCs-D which is a better regulated segment vis-à-vis NBFC-ND-SI makes up to just around 14 per cent of the latter. In other words,the systemically important non-deposit taking NBFCs have grown faster by nearly 7 fold as at the end of March 2011 when compared with the size of deposit taking NBFCs.

As NBFC-ND-SI companies are not permitted to raise public deposits,borrowings constitute the major component of their liabilities at around 74 per cent by end of March 2005,coming down to around 65 per cent by end-March 2009 on account of the global financial crisis,and thereafter rose to 69 per cent by end-March 2011.

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