Tinkering around with NBFC regulations

Jayant M Thakur

It has become a new year ritual of tinkering with the regulations and directions relating to non-banking financial companies (NBFCs). First, on 9th January 1997, by bringing in the RBI (Amendment) Ordinance, fundamental changes were brought in. Then came the three NBFC directions on 2nd January 1998 which, once again, very seriously affected NBFCs and, in fact, for a large number of such companies, it simply meant closure of their business or at least a stopping of their lifeblood, that is deposits. Now, on 18th December 1998, a fresh set of amendments have been made which are, for a change, mainly in the form of relaxations. These changes, though delayed and, in many respects inadequate, will still provide welcome relief.

Presently, there is a clear entry barrier of net-owned funds of Rs 25 lakhs on companies seeking to accept deposits. To some extent, this, it is submitted, fair also. Note, however, that the definition of the term public deposits continues to include those deposits which are acceptedfrom friends, relatives, etc, and for which the company does not go soliciting to the general public. An entry barrier of net owned funds (NOF) of Rs 25 lakhs ensures that the number of companies that actually accept deposits will be lesser and therefore easier to control.

The requirement of credit rating is meaningless in many cases, particularly where the company does not intend to go to the general public to invite deposits. Thankfully, this requirement has been now waived and leasing/hire purchase companies can, subject to other compliances, accept public deposits of as much as Rs 10 crore as public deposits or upto 150 per cent of its NOF, whichever is lower. While this helps small- and medium-sized companies, which found obtaining of credit rating almost an impossibility, a major issue relating to companies which have not applied for registration has not been addressed. Thousands of companies exist which have not applied for registration and which, due to the provisions of section 45IA of the RBI Act,cannot carry on finance business at all, not even with their own funds, and, for whom, taking of public deposits for such business is totally ruled out. In probably most of these cases, the default in application is not intentional or with a malafide purpose. A large number of such companies are simply passive investment companies which attract attention practically only at the year-end. A fresh lease of life for such companies is absolutely essential.

Note that loan/Investment companies have not been given the relief of acceptance of deposit rating without the minimum investment grade credit rating. Changes relating to leasing/hire purchase companies: Such companies have now been permitted to accept public deposits even if they do not have a credit rating. Broadly speaking, there are now only two categories, depending on whether the company has or has not the minimum credit rating. In the first category, such a company not having a credit rating, can accept public deposits of 150 per cent of their NOF orRs 10 crore, whichever is lower, if the following conditions are satisfied;

It has a NOF of at least Rs 25 lakhs

It complies with all the prudential norms

As per its latest audited balance sheet, it has a capital adequacy ratio of at least 15 per cent.

In the second category, such company can accept public deposits upto 400 per cent of its NOF provided that it has a NOF of at least 25 lakhs, it complies with all the prudential norms, it has the minimum investment grade credit rating. Prior to this amendment, in respect of companies having credit rating, depending upon whether such a company had a minimum credit rating, AA rating or AAA rating, it was permitted to accept deposits upto 150 per cent, 250 per cent and 400 per cent of its NOF, respectively. Note that if the hire purchase/leasing company proposes to accept deposits without the minimum credit rating, it will have to expressly state in the application form that its deposits do not exceed 150 per cent of its NOF or Rs 10 crore,whichever is less. Changes relating to investment/loan companies: Unlike hire purchase/leasing companies, loan/investment companies are not granted permission to accept deposits if they do not have credit rating. Broadly speaking, there is now only a single category of companies. A company which has a NOF of at least Rs 25 lakhs, has a minimum investment grade credit rating, complies with all the prudential norms and has a capital adequacy ratio of at least 15 per cent as per its latest audited balance sheet, can accept public deposits upto 150 per cent of its NOF.

However, exceptions are made for non-compliance of the minimum capital adequacy ratio of 15 per cent. If such a company does not have such minimum capital adequacy ratio but has a credit rating of AA (that is higher than the investment grade rating), it can accept public deposits upto 100 per cent of its NOF, provided that it attains the minimum capital adequacy ratio of 15 per cent by 31st December 2000. If it does not so attain the capitaladequacy ratio by such date, it will lose its eligibility to accept or renew public deposits. A loan/investment company, which has a credit rating of AAA but does not have the minimum capital adequacy ratio of 15 per cent, can accept deposits upto the deposits existing with it on 18th December 1998 or 150 per cent of its NOF, whichever is more, provided that it too raises its capital adequacy ratio to 15 per cent by 31st December 2000.

In other words, after this amendment, the intention is that all loan/investment companies should immediately, or within two years, achieve a capital adequacy ratio of 15 per cent to be eligible to accept public deposits.

Note that prior to this amendment on 18th December 1998, the acceptance of deposits by such companies was on the basis of its credit rating, apart from compliance with all the prudential norms. Depending upon whether such a company has a credit rating of A, AA, or AAA, such a company could accept or renew deposits upto 50 per cent, 100 per cent or 200 percent, respectively.

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