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Aug 29, 2011, 04.31 PM IST | Source: CNBC-TV18

NBFC recos don't require legal changes: Usha Thorat

The Reserve Bank of India (RBI) on Monday released the Usha Thorat committee report on non-banking finance companies (NBFCs). Usha Thorat, director, Centre for Advanced Financial Research said, NBFC recommendations do not require legal changes.

Usha Thorat, director, Centre for Advanced Financial Research

The Reserve Bank of India (RBI) on Monday released the Usha Thorat committee report on non-banking finance companies (NBFCs).

In an interview to CNBC-TV18, Usha Thorat, director, Centre for Advanced Financial Research said, the whole objective was to look at systemic risk and to look at issues of regulatory arbitrage. “We need more uniform regulations to reduce arbitrage,” she added.

She further said, NBFC recommendations do not require legal changes.

Also read: RBI releases report on NBFC issues

Below is the edited transcript of her interview with CNBC-TV18's Latha Venkatesh and Gautam Broker. Also watch the accompanying videos.

Q: What were the principles on which this committee made its recommendations?

A: Let me tell the broad principle. We wanted to give the whole objective of regulation, a very focused objective.

We had been dealing with the problem of deposit taking companies right from 1997-1998 and that had largely been taken care of.  We started focusing on non-deposit taking companies, which were accessing public funds from 2006.

By the beginning of this year we felt that we needed to rationalise the whole process of regulatory and supervisory focus. And that is why this working group was set up. So, the whole objective was to look at systemic risk and to look at issues of regulatory arbitrage.

Q: I am sure you must have studied a lot of loans lent by banking sector to NBFCs and on lent by the NBFCs to various sectors. Where did the committee see red flags?

A: Before we look at the red flags, let’s look at the whole strength of this sector. It’s a very heterogeneous sector, but it provides a financial services and credit to sectors in very niche areas. So, it is very innovative, very heterogeneous, very last mile connectivity possible and capable of a fair degree of innovation. So, we did feel that there was a role for this sector.

However, there were certain areas where we felt that there could be issues, which could be a matter of concern. These mostly related to the real estate exposures and the capital market exposures.

What happens in the financial system is that risk tends to gravitate to where there is least regulation. This has been one great lessons of the global crisis. In our system, there were certain areas where it could happen. NBFCs, which were leveraging public funds, were actually into more risky areas. While many of these areas require that kind of financing, we also felt that it required buffers in the form of both capital and liquidity.

You must remember one thing, which comes out strongly in this report, that in the case of the banks and the banks’ subsidiaries, there are sectoral caps. There are sectoral caps for capital market exposure. There sectoral caps for real estate exposure.

But for standalone NBFCs, there are no such caps. You can put in caps, which may not be such a good idea as these are NBFCs specialising in a particular sector. Therefore, what we have put the additional risk-weights.

For complete interview watch the videos.

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