Aug 29, 2011, 10.36 PM | Source:

RBI releases report on NBFC issues

The Reserve Bank of India (RBI) on Monday released a report on issues and concerns of non-banking finance companies or NBFCs. Usha Thorat, (a former deputy governor of RBI) led working committe has brought out the report.

RBI releases report on NBFC issues
Moneycontrol Bureau

The Reserve Bank of India (RBI) on Monday released the Usha Thorat committe report on non-banking finance companies or NBFCs. The report speaks about the issues and concerns  of the NBFCs. (Thorat is a former deputy governor of RBI).

Here are some key recommendations of Thorat-committee:

Tier I capital of NBFCs to be at 12%
So far, NBFCs’ capital adequacy requirement is at 15% wherein there is no stringent stipulation of tier I or tier II capital. If the recommendation is accepted, every NBFC has to have a minimum tier I capital or equity capital of 12%.

Provisioning norms for NBFCs would be similar to those for banks.

In April this year, RBI increased provisioning norms for banks from 10% to 15% on sub-standard assets (where interest payments have not been made for two months) while restructured assets (where concessions have been given to the borrower to prevent the loan from going bad) too have to be provided at 2% as against 0.25-1% earlier. If accepted, NBFCs too have to follow this. NBFC heads feel such provisioning is good on a longer term basis. Interestingly, it has an income tax benefit. The proposed income tax deduction is seen as a big relief.

Liquidity ratio to be introduced for 30 days 

RBI has recommended maintaining a liquidity ratio of for 30 days. Which means an NBFC has to set aside cash balance equivalent to its debt payments due every month. This debt may include repayment of bank loans, interest payment to bond subscribers and others. Asset finance companies, especially those with longer repayment cycle, may be impacted. The measure is perceived to be important to check asset liablity mismatch of NBFCs.

Risk weights for NBFCs, not sponsored by banks may be raised to 150% for capital market exposures and 125% for commercial real estates
This reflects RBI’s intention to bar NBFCs from taking higher exposure in capital market and real estate. Two such sectors are considered to be risk-prone and inclusive of high volatility. However, asset finance companies which basically do business of funding asset purchases would not be impacted due to this.

NBFCs may be given be given benefits under SARFAESI Act
Under Securitisation and Reconstruction of Financial Assets And Enforcement of Security Interest or SARFAESI Act, an NBFC would not move to the court to auction underlying assets to recover loan dues. It will just publish a newspaper notice before such auction. However, it hardly makes any difference for gold loan companies as gold is “pledged” against the loan.

Analysts take on the RBI report:

Analysts, tracking NBFCs, refused to jump the gun. This is just a recommendation. Based on it, there is no point in giving fresh calls on NBFC stocks. It will take time to put out final guidelines. The committee report is more or less on expected lines, they said adding that they would be closely watching each development.

Saikat Das



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