The NBFC lobby, predictably, raised a shindig about this, and said that the move would leave the segment crippled, if not dead, in the long run. Finance firms with ratings below grade A, the Reserve Bank said, would not be allowed to raise fixed deposits. It also ruled that triple-A rated NBFCs in the equipment leasing and hire-purchase business would be allowed to raise funds only up to three times their net-owned funds. For double-A rated firms the cap was fixed at two times their net-owned funds, while single-A rated companies were to satify themselves with a deposit-raising ability equal to their net funds.

This spelt doom for an industry that had collected deposits far in excess of the revised limits. What's more, some firms were using the money so collected to fund their purchase of long-term assets.To make matters worse, rating agencies went on a downgrading spree: nearly 120 companies were downgraded in just the first three quarters of 1997-98. This would not have hamstrung the companies much had it not been for the central bank's new directives.

The bigger fish welcomed one thing, though. The central bank's move to bar those finance firms that had net owned funds of less than 25 lakh from raising deposits, they said, would force a shakeout in an industry far too crowded for comfort--at last count, there were 35,000 NBFCs in the country.

The tight leash was, perhaps, not destined to last for long. The central bank decided to yield to the pulls and pressures of a powerful lobby. The result: By the end of the month, Reserve Bank struck down some of its earlier directives. This meant that equipment-leasing and hire-purchase companies with minimum investment-grade rating could access public deposits, after all. The cap on the quantum of deposits, too, was raised.

The central bank also redefined theconcept of net-owned funds as interpreted for deposit acceptance and prudential norms by including preference shares--compulsorily convertible into equity--under the head. In other words, finance firms' deposit-mopup abilities rose overnight.

The ruling Bharatiya Janata Party, which had promised to look into the demands of the sector in its election manifesto, kept its word: On July 27, finance minister Yashwant Sinha announced the setting up of a task force for reviewing the regulatory framework of non-banking finance companies. The task force was headed by CM Vasudev, special secretary (banking), ministry of finance.

The panel, which submitted its report in October, suggested that NBFCs' credit ratings should be de-linked from its deposit-raising ability. The Reserve Bank was left with no choice, and announced in December that ratings would be delinked from deposits.

Under the revised deposit-acceptance norms, unrated leasing and hire-purchase companies with net funds of Rs 25 lakh and more would beallowed to raise deposits not exceeding 1.5 times their funds or Rs 10 crore, whichever was less.

Companies with net funds of Rs 25 lakh and and with minimum investment-grade ratings were now allowed to raise four times their NoF by way of public deposits, provided their capital adequacy ratio was 10 per cent or above as on March 31, 1998.