In the Union Budget for FY 2019-20, the Finance Minister announced that RBI will get greater powers to regulate Non-Banking Finance Companies (NBFCs). The financial crisis in India started with banks and then moved to non-banks and has now engulfed housing finance companies (HFCs) as well. The markets were expecting the government to take some action and strengthen the RBI’s powers. These changes have been added to the RBI Act (1934) and placed under the Finance Bill.
These measures do give teeth to the RBI for regulating NBFCs and HFCs. The question of execution will remain. In his first remarks after quitting RBI, Urjit Patel noted that RBI was slow to act against the ills of the banking sector. One could argue the same for the NBFC sector as well, over which RBI had some powers even before these additions. One hopes that the regulator is more alert to the problems next time and does not say "we didn't have enough powers".
What has been done?
First, the earlier limit for registering NBFCs with RBI extended to those who had net owned funds of Rs 25 lakhs to Rs 2 crore. The upper limit has been increased manifold to Rs 100 crore.
Second, new sections have been added (Section 45-ID and 45-IE) which allows RBI to remove one director or supersede the entire board of directors, if RBI believes this is in the public interest. In case of supersession of board of directors, the period shall not exceed five years and RBI can appoint an administrator to manage the affairs of NBFC.
Third, another new section has been added (45-MAA) which allows RBI to remove or debar the auditors for maximum period of three years, if they failed to exercise their role properly.
Fourth, RBI can take actions for resolution of NBFCs so that financial stability is not affected. It can reconstruct the NBFCs, amalgamate with any other NBFC or split the NBFC into different units. To ensure the resolution does not impact financial stability, RBI could establish bridge institutions which are temporary arrangements that help facilitate the transition smoothly.
Fifth, the RBI can ask the NBFC to furnish financial and related information about the group companies.
Sixth, the government has also increased the scale of penalties if the regulations are not followed. For example, in Section 58B of RBI Act which deals with penalties it says that If any person fails to produce any book, account or other document or to furnish any statement” the penalties “may extend to two thousand rupees in respect of each offence and if he persists in such failure or refusal, with further fine which may extend to one hundred rupees for every day”. This penalty has been increased to Rs 1 lakh and Rs 5000 in case of refusal. Likewise, penalties have been raised across other sub-sections as well.
Apart from sticks, the government has added some carrots as well. The FM noted that NBFCs play “an extremely important role in sustaining consumption demand as well as capital formation in small and medium industrial segment”. However in recent months, the NBFCs have not been getting funds from both banks and mutual funds. This has impacted well-governed NBFCs as well
In order to ensure NBFCs get funds, the government has taken some steps. It will provide one-time six months' partial credit guarantee to public sector banks on their purchase of high-rated pool assets of financially sound NBFCs. In response to this step, RBI announced today itself that banks can avail additional liquidity against their excess G-sec holdings.
The NBFCs which raise debt from public have to maintain a debenture redemption reserve (DRR) out of its profits. However, those NBFCs which raise from private placements are exempted from DRR. In order to prevent this regulatory arbitrage, the government has done away with the need to maintain DRR for both sets of NBFCs. Though, one would argue that a DRR should have been extended to NBFCs which raise debt via private placements. NBFCs will also be allowed to raise finance the TReDS platform, which shall open a new avenue of financing.
The government has also levelled the playing field for banks and NBFCs. At present, the banks are allowed to defer the tax on interest received on certain bad or doubtful debts to the year in which this interest is actually received. The FM has proposed to extend this facility to deposit-taking as well as systemically important non-deposit taking NBFCs.
Apart from NBFCs, the Government also shifted the regulation of HFCs from National Housing Bank to RBI.
In banking sector, FM informed the House that the NPAs of commercial banks have been reduced by over 1 lakh crore and IBC has led to record recovery of over 4 lakh crore. The number of public sector banks have been reduced by eight. This was due to three mergers: five State Associate Banks and Bharatiya Mahila Bank with SBI and Vijaya Bank & Dena Bank with Bank of Baroda. At the same time, as many as six Public Sector Banks have been enabled to come out of Prompt Corrective Action framework.
The Government has decided to infuse capital worth Rs 70,000 crore in Public Sector Banks. The Public Sector banks will provide online personal loans and doorstep banking. It will also enable customers of one public sector bank to access services across all public sector banks. It will also take measures to strengthen governance in public sector banks. The government could have elaborated more on this area of bank governance which is the biggest problem facing these banks.Amol Agrawal is faculty at Ahmedabad University. Views expressed are personal.