The Khanna Committee report was submitted to the RBI on April 22, 1996 but released to the public only on January 18, 1997. This was preceded by an ordinance issued on January 9, 1997 which has since been passed by Parliament - with a few modifications - to become an Act.

Among others, it now gives the RBI unprecedented and enormous powers to oversee and regulate NBFCs. The decisions taken at the RBI meeting on July 19, 1997 assumes considerable significance in the light of the same.

The Sukhomoy Chakravarty Committee in 1987 felt that a system of licensing was essential and recommended a legal obligation to obtain a licence above a cut-off level. While these recommendations have at last been acted upon, through the ordinance-January 9, 1997, what surprises one is that it has taken the government twenty-five long years to act. The purpose of this article is to have a look at the far reaching implications of the recommendations for a future supervisory framework. The committee was keenly aware of the fact that the business carried out by the NBFCs was para-banking in nature. Therefore, these entities needed to be regulated like a commercial bank. Thus, like a bank, entry point conditionalities for new entities and licensing have been stipulated. Compulsory corporatisation and registration with the RBI have been imposed not only for new entrants but also for the existing ones. Since the deposit taking activity of a NBFC is no different from that of a commercial bank, confining such activities to corporate entities alone, and stipulation of mandatory registration of such entities were long overdue. The committee has recommended in no uncertain terms that an elaborate supervisory model akin to that which is applied to the banking sector should be developed for overseeing big NBFCs.

Due significance has been attached to the nature of businesses of NBFCs. In line with the prevailing supervisory system applicable to commercial banks, the RBI has now assumed powers similar to that enjoyed by it for the purpose of regulating the banks. It is interesting to note that the recommendation requiring the NBFCs to create a reserve fund and the resultant Section 45.1.C of the Act are very similar to the provisions contained in Section 17 of the Banking Regulation Act, 1947. Following the recommendations of the Committee, the RBI has also assumed extensive powers to define the scope of audit and inspection of the NBFCs - both off-site and on-site.

The process will also cover reviewing compliances. The recommendations go even further. The scope of the inspection has been rightly enlarged to include a hitherto untouched area termed `management appraisal'. These include the quality and adequacy of the management and the board, organisation structure, profile and experience base of the senior executives, and the profile of the members of the board.

It is clear that, in future, the larger of the NBFCs, especially those with predominantly fund based and asset based activities being in a business very similar to banking - will have to adopt an approach similar to that prevailing in commercial banks. The enormous responsibilities being cast on the NBFCs under the new dispensation will need resources - financial and human - far beyond what is available to most today. The Committee has, additionally, expressed concern about the advent of the multinational companies making inroads into the Indian financial services sector. Given the large resources available at the command of these multinationals, the committee felt that there was a need to exercise caution (in what respect, has not been spelt out) and ensure that the level playing field was maintained. Appreciable sentiments - no doubt. A sell-out, or a shake-out, are options which this industry can ill-afford.

Differential approaches need to be taken while gearing up to supervise NBFCs, for the reason that the non-banking finance companies are not a homogeneous group, they vary in size and nature of business. The equipment leasing and hire purchase companies, the loan and investment companies, those focusing essentially on investment banking and advisory services, and those which have been created to act primarily as holding companies, the FIs, - each of these will need a different approach. It is heartening to note that the RBI - being conscious of the magnitude of the task involved - has already initiated steps to chalk out its approach in view of the enormous responsibilities cast on them. Further directives from the RBI are expected during October, which may go to eliminate certain ambiguities and tighten up things further.

Without taking away an iota away from the merits of the recommendations made by the Khanna Committee, and the steps being taken by the Reserve Bank, one can assume that the expectations of the committee and the regulators will put severe pressure on the NBFCs to perform and rise to their expectations. Managing a finance company, cowboy style, will certainly be a thing of the past. By all counts, the new regimen will be the beginning of a new era for the non-banking finance companies.

The author is the president at Mukand Global Finance Ltd Mumbai.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.