RBI dilutes stiff NBFC norms

The RBI’s announcement on Thursday allowing banks toclassify loans to NBFCs for the purpose of lending to truck operators as priority sector advances, is expected to help NBFCs get more funds from the banking system to augment their working capital funds. According to industry circles, the RBI is likely to reverse some more stringent measures in favour of the NBFCs.

As per the revised norms announced by the RBI in the post-CRB period (January 1998) to strengthen the NBFC regulation, the apex bank had focussed on the regulation of deposits held by NBFCs. Accordingly, NBFCs accepting or holding public deposits are regulated in a comprehensive manner. Finance companies not accepting or holding public deposits are therefore not required to furnish the returns specified by RBI. The tough posture by the RBI was adopted after a public outcry about NBFCs which duped gullible investors.

During the post-CRB period the issue assumed a political colour with the current ruling party taking an active role in criticising the central bank policy towards NBFCs. Even afterthe CRB scam, many NBFCs like DSJ Finance, Global Housing, JVG Finance and Helios Finance defaulted on their payment commitments.

The returns include the NBFC’s balance sheet and auditor’s report, the statutory annual return on deposits in the First Schedule prescribed by the Reserve Bank, the statutory quarterly return on liquid assets and half-yearly returns on prudential norms. The auditors of such companies are however required to furnish `exemption reports’ to the RBI if such a company is found to have violated any of the provisions of the Reserve Bank of India Act or specific directions issued by the central bank.

It may be recalled that RBI had drafted a comprehensive policy for NBFCs which was announced on January 2, 1998. These directives were relaxed on January 31, 1998, following intense lobbying by the NBFC industry. The guidelines announced by RBI which chose to concentrate on the deposit mobilisation functions of NBFCs, made it mandatory for NBFCs to have at least an investment grade ratingfrom credit rating agencies in order to access deposits from the public. The deposit mobilisation powers of the NBFCs were also reduced by the central bank.

The NBFC industry has been passing through a crisis period of its own creation during the past two years with an increasing number of delinquencies and also the reluctance of banks to extend funds to them. Most of the loans of NBFCs to the industry have now become non-performing assets.

It is not clear whether finance companies which have not been registered with the RBI can continue to remain in business without accepting or holding public deposits. According to the earlier norms, NBFCs which are not registered with the central bank was not allowed to function or raise public deposit.