India's majority of non-banking finance companies (NBFCs) may be freed from the regulatory clutches provided RBI implements one of the recommendations made by Usha Thorat Committee, which suggested maintaining a minimum asset size of more than Rs 50 crore along with a net owned fund of Rs 2 crore; for registering any new NBFC.
India's majority of non-banking finance companies (NBFCs) may be freed from the regulatory clutches provided the Reserve Bank of India implements one of the recommendations made by Usha Thorat Committee, which suggested maintaining a minimum asset size of more than Rs 50 crore along with a net owned fund (NOF) of Rs 2 crore; for registering any new NBFC.
The industry body of NBFCs - the Finance Industry Development Council (FIDC) recently pleaded to the regulator with this argument. Currently, there is no obligation to have a minimum asset size while the requirement for NOF remains at Rs 2 crore only. India has around 14,000 NBFCs. NOF is the sum total of equity capital and reserve.
"If this recommendation is implemented, almost 90% of the number of NBFCs shall have to be de-registered, since they have an asset base of less than 50 crores. This will lead to a situation where there shall be a number of companies who shall be carrying on NBFC activities without RBI registration. This will in our view increase the risk in the system which is not desirable," NBFCs wrote to RBI in a note.
"Deregistering or refusing registration of the companies just because they are small, that too, with a view to reduce the cost of regulation is in our view not justified. Needless to mention these companies are complying with all the regulations and do not pose any risk."
moneycontrol.com is in possession of a copy of the note. Repeated efforts to connect FIDC did not elicit any response till the time of writing this story.
In August, 2011; the committee had submitted its recommendations to RBI. The working group was constituted to review the existing regulatory and supervisory framework of NBFCs with special focus on the risks in the sector. Currently, those recommendations are under RBI's consideration.
"In early 1990s there were around 40,000 NBFCs in India, mostly not regulated. Later, a public deposit scam had rocked the NBFC industry in India underscoring the need to regulate them. If the 50 crore benchmark is finally set, we will relegate to that dark era once again," a chief financial officer from a leading NBFC told moneycontrol.com on condition of anonymity.
The implementation of the recommendation, according to the note, is also in conflict to the government's agenda on financial inclusion as small companies cater to the unbanked segment and provide last mile connectivity.
"The working group recognizes the need to amend the RBI Act in order to raise the entry level NOF. But by increasing the asset base to minimum of Rs 50 cr along with a capital adequacy ratio of 15%, the minimum NOF required automatically increases to more than 6 crore (i.e. 15% of Rs 50 cr). Thus the working group has indirectly raised the entry level NOF which is not possible without amending The RBI Act," it said.
In December, 2011; RBI mandated 15% CRAR. However, it is divided into two parts: tier I (7.5% equity capital) and tier II (7.5% debt capital).