News: NBFCs plan to petition RBI

(BL 01/12/2006) Chennai - The revised draft guidelines for Non-Banking Finance Companies (NBFC) that the Reserve Bank of India has announced on Thursday have been welcomed by the NBFC industry as "an improvement" over the previous draft guidelines. But NBFC companies discern no merit in what they see as micro management by the regulator. The draft norms put up for feedback on Thursday asks banks to cap their exposure to a single NBFC - deposit-taking or otherwise - at 10 per cent of the bank's capital funds. In contrast, the previous draft guidelines (of November 3) spoke of a ceiling of five per cent of bank's net worth. That is a significant difference, because `capital funds' include long- term bonds (tier-I I and upper tier-I I) too. Therefore, `10 per cent of capital funds' would be substantially higher than `five per cent of net worth.' Many NBFCs are not quite happy with the draft guidelines and said they would represent to the RBI against them. Within the NBFCs, those that lend money for purchase of trucks, off-highway vehicles, telecom equipment and other `infrastructure-related' equipment, have been demanding that they be classified as a separate category - asset finance companies. Many of these companies, being deposit-taking NBFCs, are already well-regulated, they feel. For instance, their minimum capital requirement is 12 per cent of their assets, as opposed to 10 per cent for non-deposit taking NBFCs. (Indeed, many in the industry question the logic of this regulation too.) They are subject to SLR guidelines. They are `hire-purchase companies' which means that at least 60 per cent of their loans are for purchase of productive assets. Why separate cap Why should bank lending to these companies be limited to 10 per cent of the bank's capital funds, they ask. In any case, banks have the single-borrower limit of 15 per cent of their loans - why should there be a separate (and more stringent) cap for NBFCs? "The RBI's concern over the end-use of loans given by NBFCs is understandable," said one source in the industry, "but in the case of asset financing companies, the end-use is clearly documented." Advantage foreign banks Sources point out that in contrast, a foreign bank could set up a NBFC subsidiary and fund customers through the subsidiary, circumventing the `single-borrower' regulation. Because these subsidiaries come under `non-deposit taking' categories, the parent bank may continue to hold even 100 per cent stake in the subsidiary.