Task force recommends stringent NBFC norms

The committee did not find justification in introducing insurance scheme for depositors and wanted RBI to set up a separate mechanism for regulation and supervision of NBFCs.

However, to facilitate growth of this sector, the task force headed by banking secretary C M Vasudev, suggested the norms be eased for flow of bank credit to the NBFCs and made a case for higher deposit ceiling for rated companies.

The task force was of the view that the present minimum capital requirement of Rs 25 lakh might be reviewed in view of the need to impart greater financial soundness and achieve economies of scale in terms ofefficiency of operations and higher managerial skills.

Given the relatively higher risk involved in NBFCs operations, a higher level of CRAR compared to banks was essential. It wants the RBI to prescribe a higher CRAR of 15 per cent for those NBFCs which seek public deposit without credit rating. Also the RBI should draw a time bound programme for disposal of applications for registration as an NBFC.

The task force has also suggested limit of public deposits for various types of NBFCs. Those with less than Rs 25 lakh net owned fund (NOF) be barred from accepting public deposits; EL/HP company without credit rating, 1.5 times of NOF or Rs 10 crore (high CRAR of 15 per cent); EL/HP company with investment grade rating, 4 times of NOF; and loan/investment companies with investment grade credit rating, 1.5 times of NOF (higher CRAR of 15 per cent).

It has also recommended ban on issue of advertisements soliciting deposits by all unincorporated bodies and suggested that deposit mobilisation by unregisteredNBFCs be made cognizable offence. It favoured setting up of a depositors’ grievance redressal authorities with specified territorial jurisdiction. The task force was of the view that the particulars given in advertisement be reviewed and a market intelligence system be created to trigger onsite inspections.

The task force, which submitted its report to finance minister Yashwant Sinha on Wednesday, underlined the need for further refinement of legislative and regulatory framework in view of the rising number of defaulting NBFCs.

The report stressed that prudential norms be reviewed by the RBI, taking into account the international norms and those prevailing for the commercial banks in the country. The RBI should prescribe ceilings for exposure to the real estate sector and also investment in capital markets specially unquoted shares. The investment norms for exposures to connected companies should also be tightened.

The task force suggested that the a separate instrumentality for regulation andsupervision of NBFCs under the aegis of the RBI be set up with representation of experts and other professionals.

It suggested that the NBFCs should invest at least 25 per cent of their reserves in marketable securities apart from the SLR securities already held by them.

The committee was of the view that RBI should consider measures for easing the flow of credit from banks to NBFCs and then consider prescribing a suitable ratio as between secured and unsecured deposits for NBFCs.

Also the liquid asset ratio should be increased to 25 per cent of the public deposit in a phased manner. By a suitable statutory provision, the task force suggested, the unsecured depositors be given a first charge on these liquid assets so that an unsecured depositor is at least assured of a return on one out of every four rupees deposited by hi.

It was further suggested that RBI might appoint depositors’ grievance redressal authorities with specified territorial jurisdiction. The office of Banking Ombudsman could be aviable option for such appointment. In the intervening period the CLB might tighten its procedures for dealing with complaints of depositors and put in place a mechanism for speedy disposal of these complaints.

The procedure for the liquidation of NBFCs be on the line with those available for banks to speedily settle the claims of various depositors and other creditors.

The task force also did not favour introduction of deposit insurance scheme for NBFC depositors "because of moral hazard issues, likelihood of asset stripping and the likely negative impact on the growth of a healthy NBFC sector."

To deal with fraudulent NBFCs, the committee suggested that the RBI should have powers to notify such companies and, "on notification, the assets of the company shall stand attached and the management be vested with a custodian to be appointed by the RBI."

Also deposit taking by unregistered NBFCs be made a cognizable offence and suggested that state governments should set up special investigation wings forenforcing these provisions. The offence of unauthorised deposit taking by unincorporated financial intermediaries too be made cognizable and the state governments should consider enacting legislation on the lines of the legislation enacted by Tamil Nadu legislature.