Page 90 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 7: Non-banking Financial Companies

measure of liquidity aggregate incorporating NBFCs with public deposits worth 20 crores and Notes
above. For regulatory purposes, NBFCs have been classified into three categories:
1. those accepting public deposits,

2. those not accepting public deposits but engaged in financial business, and
3. core investment companies with 90 per cent of their total assets as investments in the
securities of their group/holding/subsidiary companies.
The focus of regulatory attention is on NBFCs accepting public deposits. As per the NBFC
Acceptance of Public Deposits (Reserve Bank) Directions, 1998, the quantum of public deposit in
respect of NBFCs was linked to credit rating from an approved agency so as to enable the
depositor to make informed decision. The NBFCs were also encouraged to broad-base their
resources through borrowings from banks and financial institutions, inter-corporate deposits/
loans, secured bonds/debentures, etc., which were exempted from the definition of "public
deposit". However, the Associations of NBFCs and the apex trade bodies brought to the notice of
both the Government and the RBI the problem of asset-liability mismatches caused by frequent
downgrading of the credit ratings of NBFCs and the consequent reduction in quantum of
permissible public deposits. They also suggested that smaller NBFCs could be exempted from
the requirement of credit rating for having public deposits up to a particular limit while larger
NBFCs could be allowed higher limits of public deposits subject to minimum investment grade
credit rating and higher capital adequacy requirements. The Task Force on NBFCs appointed by
the Government of India submitted its report in October, 1998, which recommended
rationalisation of regulations for NBFCs, improvement of the legislative framework for
protecting the interests of depositors and development of NBFCs on sound and healthy lines.
The modified regulatory framework for NBFCs based on the recommendations made by the
Task Force provides for the following:

Caselet RBI to Plug Regulatory Gaps in NBFC Biz

he Reserve Bank of India plans to strengthen the regulatory framework for
non-deposit taking systemically important non-banking finance companies as
Ttightening of the regulation for the banking sector has increased the incentives for
regulatory arbitrage by moving business to NBFCs.

Pointing out that setting up an NBFC is a more attractive option as entry point norm for
them (at present net owned funds of 2 crores) is low as compared to that for banks ( 300
crores) and that they are subject to relatively lighter touch regulation, the RBI, in its
second financial stability report said "some concerns remain especially in the context of
the rapidly expanding NBFC sector."
Among the reasons why regulatory gaps need to be plugged include NBFCs not being
subject to any restrictions regarding investment in the capital market thereby leading to
enhanced market risk; nor do they have any restrictions on setting up of subsidiaries,
thereby allowing setting up of possibly opaque structures with concomitant transparency
issues. Further, quality of corporate governance and management can give rise to serious
concerns, the report said.

Another concern that arises is in the context of definition of an NBFC in terms of its
"principal business" which makes it possible for an NBFC to conduct some other
non-financial activity by deploying funds in non-financial assets, leading to a lack of level
playing field vis-à-vis banks.
Contd...

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