Panel Wants Prudential Norms at Par With Commercial Banks

Reserve Bank of India (RBI) panel for reforms in the non-banking financial company (NBFC) sector has suggested for an increased capital adequacy and risk weightages for NBFCs, making it almost at par with capital and prudential requirement of commercial banks. The panel has also suggested that NBFCs should be allowed to raise only up to 8 times its net owned funds against 12 times now.

The panel, while suggesting stricter controls on NBFCs, has left the business model intact. Risk weightage for real estate exposure has gone up to 125 per cent while for capital market it is at 150 per cent and also seeks to take away the arbitrage between banks and NBFCs on provisioning norms.

Any change in the shareholding, direct or indirect, of 25 per cent and above, change in control, merger or acquisition of any registered NBFC should have prior approval of RBI. RBI has set up this panel as NBFCs were growing in size and becoming systemically important. Even bank credit to this segment has been growing and now the end use of these funds will be more effectively monitored.

Panel has suggested that minimum net owned fund requirement of new NBFCs could be retained at Rs 2 crore till the Reserve Bank of India Act is amended. RBI, however, should insist on a minimum asset size of more than Rs 50 crore for registering any new NBFC. Existing NBFCs below this limit may deregister or be asked to seek a fresh certificate of registration at the end of two years.

The panel headed by former deputy governor Usha Throat. She is now the director at the Center for Advances Financial Research and Learning, the research and analysis wing of the RBI.

Sanjiv Bajaj, managing director, Bajaj Finserv, told Financial Chronicle, “Some of the NBFCs have grown very large over the last five years, so it is quite necessary to bring in regulation and supervisory mechanism in place.“ The risk weights for NBFCs that are not sponsored by banks or that do not have any bank as part of the group may be raised to 150 per cent for capital market exposures and 125 per cent for commercial real estate (CRE) exposures. In case of bank-sponsored NBFCs, the risk weights for capital market exposures (CME) and CRE may be the same as specified for banks.

Total number of NBFCs at the end of March 2010 was 12,662 comprising 311 deposit taking NBFCs, 295 systemically important nondeposit taking companies and 12,056 other non-deposit taking NBFCs. The assets of the sector grew from Rs 34,790 crore in 1997-98 to Rs 6,61,186 crore in 2009-10. Captive NBFCs, the business models of which focus mainly (90 per cent and above) on financing parent company's 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.

R Sridhar, managing director, Shriram Transport Finance Company, said the proposed new norm for tier-I capital at 12 per cent will not impact us. “Our tier-I capital is around 18 per cent. This may impact business of Exercising control Risk weights for NBFCs may be raised to 150 per cent for capital market exposures Total number of NBFCs at the end of March 2010 was 12,662, including 311 deposit taking NBFCs The assets of the sector grew from Rs 34,790 crore in 1997-98 to Rs 6,61,186 crore in 2009-10 smaller NBFCs, who operate in diverse sectors.“

V Vaidyanathan, vicechairman and MD, Future Capital Holdings, said in a release, that the guidelines on NBFCs focus on systemic risks. “The treatment on capital market exposures is the steepest. This is warranted considering the volatility in the stock markets. RBI has left the business model intact and has just tightened the norms. Higher risk weightage for real estate is also warranted,“ he said.