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Our Economic Bureau
New Delhi, Oct 28: The task force on non-banking finance companies has recommended that companies without credit rating be permitted to access public deposits provided they attain a higher capital adequacy ratio (CAR) of 15 per cent.
The panel has also suggested enhanced minimum entry capital, tighter prudential norms along with exposure limits for NBFC funds in real estate and capital markets.
The committee did not find justification in introducing an insurance scheme for depositors and wanted the Reserve Bank of India (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 CM Vasudev suggested that 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 achieveeconomies of scale in terms of efficiency of operations and higher managerial skills.
Given the relatively higher risk involved in NBFCs' operations, a higher level of CAR compared to banks was essential. It wants the RBI to prescribe a higher CAR of 15 per cent for those NBFCs which seek public deposits without credit rating. Also, the RBI should draw a timebound programme for disposal of applications for registration as an NBFC.
The task force has also suggested the limit on public deposits for various types of NBFCs. Those with less than Rs 25 lakh net owned funds (NOF) will be barred from accepting public deposits; EL/HP company without credit rating, 1.5 times of NOF or Rs 10 crore (high CAR 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 CAR of 15 per cent).
It has also recommended a ban on the issue of advertisements soliciting deposits by all unincorporated bodies andsuggested that deposit mobilisation by unregistered NBFCs be made a 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 advertisements be reviewed and a market intelligence system be created to trigger on-site 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.
It suggested that a separateinstrumentality for regulation and supervision 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 felt 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 deposits in a phased manner. By a suitable statutory provision, the task force suggested, the unsecured depositors should 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 him.
It was further suggested that RBI might appoint depositors' grievance redressal authorities with specified territorial jurisdiction. The office ofbanking ombudsman could be a viable option for such an appointment. In the intervening period the Company Law Board (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 should be on the lines of the procedure available for banks to speedily settle the claims of various depositors and other creditors.
The task force did not favour introduction of a 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."
It suggested that deposit taking by unregistered NBFCs be made a cognizable offence andstate governments should set up special investigation wings for enforcing these provisions. The offence of unauthorised deposit taking by unincorporated financial intermediaries too should be made cognizable and the state governments should consider enacting legislation on the lines of the legislation enacted by Tamil Nadu legislature.
Our Research Bureau adds: The task force has yielded to lobby pressure by exempting NBFCs from credit rating so long as they have a capital adequacy ratio of 15 per cent. (NBFCs have taken fright at recent rating downgrades.) For every Rs 15 lakh of net owned funds, an NBFC can raise deposits of Rs 1 crore. This is hardly a safeguard for deposits which are the liabilities of the NBFCs. Freedom from rating should be related to the size of deposits and not to the proportion of capital.
The task force should have confined rating exemption to the NBFCs holding deposits of less than, say, Rs 2 crore (in view of the decision to raise minimum capital to over Rs 25 lakh) andmade rating mandatory for larger deposits but without the stipulation that "AAA" rating is a must for soliciting deposits.
Higher or lower ratings would enable the public to assess risk (and the corresponding reward required in terms of the rate of interest). Without ratings, NBFCs will not be able to inspire public confidence -- which has suffered a severe setback in the last two years -- nor will it be easy for them to get accommodation from risk-averse banks. The task force has served neither the depositor nor the NBFCs.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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