Discussing the new norms laid out by the Reserve Bank of India with respect to non-banking finance companies (NBFCs) Raman Aggarwal, Director, FIDC, and SVP, SREI Finance, said that even as the central bank had decided to bring down NPA norms on par with banks, NBFCs should have similar recovery mechanisms available with them, which they currently don’t have access to.
“We are not covered under the SARFAESI Act. We do not have access to the debt recovery tribunal,” he told CNBC-TV18’s Latha Venkatesh in an interview. “So, we are left to the mercy of filings, indirect means of recovery. There is no statutory backing available for recovering our loans.”
While former RBI deputy governor KC Chakraborty said the norms were in line with where global regulations were moving and said there was no reason to treat NBFCs any different from banks.
He added that with norms getting stricter over time, “NBFCs which have a roadmap to become a bank will survive. Others have to leave the finance business. Whether it will happen in three years or five years or seven years I don’t know.”
Below is the edited transcript of the interview on CNBC-TV18.
Q: Will these rules be very difficult? I guess you know the problems of an asset finance company, asking all of them to get rated is a tall order?
Aggarwal: It was a tall order till some time back more so because all the approved rating agencies had a same rating model for whether you are a Rs 500 crore company or you are just a Rs 2 crore company. So, in that scenario it was practically impossible for any small NBFC to attain a investment grade rating irrespective of the overall performance. However just recently RBI has accepted one of our demands and they have accredited SMERA rating agency which is a rating agency exclusively for SME sector. So, that provides some relief.
Q: So, meeting the rule is not tough?
Aggarwal: It may not be that tough. However the two key issues which I foresee immediately affecting is one, NPA norms the bad loans. Let us appreciate one fact it has to be a two sided thing. If you are tightening the NPA norms you also need to give us recovery tools. Right now NBFCs do not have any laid out recovery mechanism available. We are not covered under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act.
We do not have access to the debt recovery tribunal. So, we are left to the mercy of filings, indirect means of recovery. There is no statutory backing available for recovering our loans. That is very important, unless that is done I think this would be difficult, number one. Number two, the kind of clientele to which NBFCs cater to, generally NBFCs are know to take credit risk to the unbanked segment. So, in this scenario of a slowdown this becomes a harsh provision.
Q: Slowdown will be over by then, it is kicking in in 2018. But it is only 5 months for FY201 to come in and recovery period being brought to 5 months from 6.
Aggarwal: Agreed but look at all these provisions, unless you give us some recovery tools these things are not justified.
Q: What about the provisioning, standard asset provisioning has been raised from 0.25 to 0.40?
Aggarwal: We were expecting that to come in and they have given some time. So, I don’t see that as a very major issue. The other big issue would tier I capital which has to be raised to 10 percent. That is something that time shall tell how the markets behave overall and how do these things take shape.
Q: The 90 day (NPA) norm kicks in for non-banking financial companies (NBFCs) but with a good three and a half years to adjust to the new rules – while standard asset provisioning has been raised from 0.25 to 0.4, these are the immediate ones that affect the P&L itself. Do you think these are called for?
Chakrabarty: These are unavoidable. You must see what is happening globally [this is being done globally] and there should be no regulatory arbitrage here. It is the global trend. Regulation is now being prepared globally -- at the BIS, G20, IMF or World Bank level and each country has to follow. NBFCs get some time, a long time [to comply].
In fact, I don’t understand why NBFCs need three and half years to follow the 90-day norm. But anyhow, all prudential norms etc have to be identical for banks and NBFCs.
Q: There was a legitimate point that Raman Agarwal of FIDC is making that they don’t have any teeth to recover, they are not covered by Sarfaesi, they cannot approach debt recovery tribunals…
Chakrabarty: That is why your due diligence has to be so stringent. So they should require to recover it in 60 days not even 90 days. That
Now if you have a security you can wait for one year, if you don’t have any security anything to fall back you must reserve on next day.
Q: But nevertheless it stands to reason that in spite of the best of diligence there will always be crooks and there will always be unusual circumstances, it is only fair that they are asking for tools of legal system?
Chakrabarty: I don’t agree. If he is a crook, even after 180 days he will not pay. But the fellow who wants to pay, he will pay after 90 days, the fellow who doesn’t want to pay, will not pay even after 180 days. So this is logic is not applicable for crooks.
If they are good borrower you must be able to recover as and when it becomes due. Now, if they give the argument of business cycle of the borrower: you give him 180 days, no problem, but once it is due within 90 days you must recover. There should not be any compromise with that.
Q: There is also a requirement that systemically important NBFCs should have Tier I capital of 10 percent, up from 7.5 percent. This is a stricter rule than it is for banks?
Chakrabarty: If you are systemically important, you will be regulated on par with banks.
Q: But banks don’t have 10 percent Tier I.
Chakrabarty: After Basel III [norms come in], it will come to more than 10 percent.
Q: How do you expect all these rules to impact the NBFC sector itself. Three years down the line will it look very different or even one year down the line, do you think you are going to see a lot of mortality?
Chakrabarty: NBFCs which have a roadmap to become a bank will survive. Others have to leave the finance business. Whether it will happen in three years or five years or seven years I don’t know. Either you become full-scale regulated financial institution or you leave the finance business.
Q: Full scale bank as in universal bank?
Chakrabarty: If not universal bank some other institution: a payment bank or small bank. That’s not what I am saying, that’s where global regulation is moving, and across the countries shadow banks have to follow this particular path.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
