Number of NBFCs surrendering licences to RBI at four-year high

At an overall industry level, there has been significant improvement in the underlying book quality of NBFCs.

The number of non-banking finance companies (NBFC) surrendering their licences to the Reserve Bank of India (RBI) has risen to a four-year high so far in 2023, a Moneycontrol analysis shows.

Experts attribute this to the tough business environment and increase in entry-level minimum net-owned fund requirement. They further add that surrender or cancellation of licences to the central bank are not indicators of stress or concerns in the sector on the regulatory front.

“The single major reason for all this is the entry-level minimum net-owned fund requirement that has gone up significantly,” says Raman Agarwal, Director, FIDC.

Krishna Kanhaiya, CEO, Mirae Asset Financial Services, says some of these NBFCs were non-operational investments or holding entities and others have ceased to exist as separate legal entities on account of amalgamations or mergers.

What do the numbers say?

According to data from the RBI website compiled by Moneycontrol, 93 NBFCs have surrendered their licences to the central bank so far in 2023.

This is the highest in four years - 38 NBFCs surrendered their licences in 2022, 22 in 2021, 30 in 2020 and 59 in 2019. The number is higher at 139 in 2018.

Of the total in 2023, as many as 49 NBFCs have surrendered their licences because they have exited the finance business, 31 surrendered licences as they ceased to be legal entities due to the amalgamation/merger/dissolution/ voluntary strike-off. The remaining entities do not require registration as per guidelines.

The total number of NBFCs registered with the RBI stood at 9,443 as of March 31, 2023. Of the total, non-deposit-taking NBFCs (NBFC - ND) number 8,966, systemically important non-deposit-taking NBFCs number 413, and deposit-taking NBFCs are just 39, RBI data shows.

Minimum net-owned fund requirement regulations

Last year, the RBI issued guidelines for loans and advances by NBFCs and the disclosures they are required to make under what it called a scale-based regulatory framework.

This was introduced with an aim to tighten the regulatory noose on NBFCs, especially after the fallout of large NBFCs in the last few years posed systemic risks.

According to the guidelines, regulatory minimum Net Owned Fund (NoF) for NBFC-ICC (Investment and Credit Company), NBFC-MFI and NBFC-Factors shall be increased to Rs 10 crore by March 31, 2027. The increase may be gradual.

The current NoF for NBFC - Investment and Credit Company stands at Rs 2 crore and must increase to Rs 5 crore by March 31, 2025, and finally to Rs 10 crore by March 31, 2027.

Similarly, NBFC MFI and NBFC Factors must increase their NoF from Rs 5 crore to Rs 7 crore by March 31, 2025, and then to Rs 10 crore by March 31, 2027.

What do the experts say?

Agarwal says small companies are now required to infuse fresh capital, which is a tough task. Sadaf Sayyed, Chief Executive Officer of Muthoot Microfin Ltd says NBFC regulations are becoming tighter. The capital requirement is higher, hence people who were keeping dormant NBFC licences are surrendering them to avoid a compliance burden.

Is liquidity also an issue?

Experts say there is no liquidity stress on the NBFCs, but smaller companies do face challenges in raising funds from the market.

At an overall industry level, there has been significant improvement in the underlying book quality of NBFCs and the liquidity situation has improved, according to recent reports by various agencies, says Kanhaiya.

He further said some of the fintech and venture capital or private equity-backed NBFCs are likely to see some stress and challenges on account of the prevailing ‘funding winter’.