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Revised Regulatory Framework For NBFCs

Published on Mon, Nov 10,2014 | 21:26, Updated at Mon, Nov 10 at 21:26Source : Moneycontrol.com 

By: Vinod Kothari, CEO -Vinod Kothari & Co

The RBI has revised the regulatory framework for NBFCs. This was on the anvil since the Usha Thorat Committee report in late 2012. The Nachiket Mor Committee had also made certain recommendations.

The highlights of the revised regulatory framework are as follows:

1. Minimmum NOF raised to Rs 2 crores: Rs 2 crores has been the minimum NOF ever since 1999, and there are only a handful of companies that existed before April 1999 which continue with a capital of Rs 25 lacs to Rs 2 crores. Not too many companies will be affected by this change.

2. Deposit Acceptance: This is yet another inconsequential change. Only about 3% of the NBFCs are accepting deposits currently. The rule says that unrated NBFCs will not be allowed to access deposits, and in addition, the extent of deposits they can attract will be curtained to 1.5 times of net owned funds, from the existing 4 times. This change is unlikely to affect most large NBFCs, as most of them are not accepting deposits.

3. Systemic important threshold raised to Rs 500 crores: The current threshold for “systematically important” companies is Rs 100 crores. This is being increased to Rs 500 crores. Systemically important companies are subjected to more intensive regulation. It is expected that several NBFCs, particularly those which are holding group shares, will come out of the definition of systematically important, and  hence, be subjected to less intensive regulation.

Importantly, the categorisation of NBFCs  as those exceeding Rs 500 crores or those within the limit will be done on “group” basis. The word “group” is being given a wide meaning for this purpose. Currently, such wide meaning is being followed in context of core investment companies

4. Relaxation of prudential norms for not-systematically-important companies: In a bold move, in line with the recommendations of the Usha Thorat panel, the RBI has decided to relax its prudential and conduct-of-business regulations for NBFCs, which are not having assets of Rs 500 crores or above. The relaxed regulatory norms will have the following types of NBFCs and regulatory regime:

a. Asset size, below Rs 500 crores, no public funds, no customer interface: No prudential or conduct-of-business (KYC, fair practices code or FPC) regulations

b. Asset size, below Rs 500 crores, no public funds, having customer interface: Conduct of business regulations.

c. Asset size, below Rs 500 crores, having public funds: Prudential regulations. Capital adequacy requirement is being done away with; however a leverage ratio of 7 times is being introduced

d. Asset size Rs 500 crores or above and depository NBFCs: intensive regulation, as discussed below

5. Prudential regulations for systematically important NBFCs: Much of these changes are also in line with Usha Thorat committee recommendations. The significant changes are:
 
a. Tier 1 capital (net worth) is being raised to 10% in a phased manner by March 2017.

b. NPA recognition norms are being reduced from 12 months in case of lease/HP transactions, and 6 months in case of loan transactions, to 3 months, to bring them at par with what they are for banks. This will be done in a phased manner so as to achieve it fully within March 2018. Thus the regulatory arbitrage in case of NBFCs dries up completely.

c. Provisioning norms for standard assets: are being increased from 025% currently to 0.40% in a phased manner, by 2018. This will mean a substantial pressure on NBFC profits in time to come.

6. Fit and proper person requirement for NBFC directors: The RBI has implemented the fit and proper person criteria for NBFC directors. These are also largely in line with the Usha  Thorat recommendations.

Our critique:

1. India has about 12000 plus NBFCs. The Usha Thorat panel recommended de-registration of systematically unimportant companies, so as to clear the mass in the NBFC regulations. It is not clear whether the de-registration provisions are being carried. Otherwise, while there is no substantive regulation of smaller NBFCs, perfunctory administrative controls may still prolong.

2. Effective date of the new regulations is not yet known as the notifications are yet to be issued. Usually, the devil may lie in the details.

 
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