According to a recent Reserve Bank of India notification, issued by the chief general manager VG Damle, the apex bank, in a bid to give more operational freedom to banks in the matter of credit disbursement, has decided to "remove the ceiling on bank credit prescribed by RBI, which was linked to NOF, in respect of all NBFCs."

Such NBFCs should be statutorily registered with the RBI and the notification covers those companies whose principal business is equipment leasing, hire purchase, loan and investment activities. However, in respect of residuary non-banking finance companies (RNBFCs), bank finance would continue to be restricted to the extent of their NOFs, the notification said.

In an earlier circular of April 15, 1997, the RBI had stipulated that bank credit was to be restricted to three or two times the NOF for NBFCs in the category of both equipment leasing andhire purchase companies, while the advances would be equal to the NOF in respect of loan and investment and RNBFCs. This was applicable for those companies which had not yet registered themselves with the RBI, as at that time the process of registration was still going on. With registration being compulsory now, the RBI has decided to lift the restriction.

According to the fresh notification, in case of those companies which do not require to be registered with RBI - which include nidhis, chit funds, insurance companies, stock broking companies, merchant banking companies and housing finance companies--banks can take their credit decisions on the basis of usual factors such as the purpose of the credit, nature and quality of the underlying assets, repayment capacity and so on.

However, RBI has barred banks from lending to NBFCs for certain activities. Finance will not be provided for bill discounting and rediscounting by NBFCs, "except for rediscounting of bills discounted by NBFCs arising from sale ofcommercial vehicles, including light commercial vehicles."

Credit is also not to be provided for investments made by the finance companies in shares, debentures and generally stock-in-trade investments. But stock broking companies can be provided need-based credit against shares and debentures held by them as stock in trade, says the notification.

Other activities for which bank finance is barred are investments of NBFCs in and advances to subsidiaries, group companies or other entities and investments in other companies and inter-corporate loans or deposits in other companies.

No changes have been made in the instructions prohibiting grant of bridge loans to the finance companies, as also loans of a bridging nature in any form to these companies including against capital and debenture issues. This should come as a welcome step for the NBFC sector, as lack of bank credit flow to them has been a major grouse for them especially in the aftermath of CRB Capital Markets episode.

The confidence level ofthe banking sector in NBFCs has also not been improved by the alarming rate at which some of them have turned defaulters with their inability to pay back their depositors.