RBI panel proposes tough guidelines for NBFCs

Recommends asset classification and provisioning similar to banks.

Recommending a tough regulatory environment for non-banking finance companies (NBFCs),a Reserve Bank of India panel has proposed a host of tough measures such as asset classification and provisioning norms similar to banks,and a hike in Tier-I capital adequacy ratio in a phased manner. The proposals,if implemented,will reduce the gap between NBFCs and banks and curb the regulatory arbitrage between them.

The panel,headed by former RBI Deputy Governor Usha Thorat,has proposed that liquidity ratio should be introduced for all registered NBFCs such that cash,bank balances and holdings of government securities fully cover the gaps between cumulative outflows and cumulative inflows for the first 30 days.

Suitable income tax deduction akin to banks may be allowed for provisions made under the regulations. Accounting norms applicable to banks may be applied to NBFCs, it said. The RBI Working Group was constituted to review the existing regulatory and supervisory framework of NBFCs with special focus on the risks in the sector.

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NBFCs should be subject to regulations similar to banks while lending to stock brokers and merchant banks and similar to stock brokers,as specified by the Securities and Exchange Board of India,while undertaking margin financing. Financial conglomerate approach may be adopted for supervision of larger NBFCs that have stock brokers and merchant bankers in the group.

Tier-I capital for Capital to Risk Weighted Assets Ratio (CRAR) purposes may be specified at 12 per cent to be achieved in three years for all registered deposit taking and non-deposit taking NBFCs, it said.

According to the panel,NBFCs may be given the benefit under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act,2002. Captive NBFCs,the business models of which focus mainly (90 per cent and above) on financing parent companys products,may maintain Tier-I capital at 12 per cent from the time of registration. Supervisory risk assessment of such companies should take into account the risk of the parent company,it said.

Government owned entities that qualify as NBFCs may comply with the regulatory framework applicable to NBFCs at the earliest, the panel said.

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Board approved limits for banks exposure to real estate may be made applicable for the bank group as a whole,where there is an NBFC in the group.