Page 91 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes
Multiple regulators for non-banking financial entities in the country and an entity-based
approach to regulation gives rise to possible regulatory gaps - functional activities
remaining unregulated, gaps in regulation permitting surrogate raising of public funds,
leveraged activities by entities like merchant banks, portfolio managers and brokerages
not being subject to prudential regulation. These, according to the report, will need to be
urgently addressed.
Referring to the fact that certain NBFCs, coming under the purview of other regulators,
have been exempted from the regulatory purview of the RBI subject to certain conditions,
the central bank said this has given rise to instances of certain functional activities of some
exempted NBFCs (for example merchant banks) remaining unregulated.

Source: http://www.thehindubusinessline.in

7.2.1 Progress/Growth

Non-banking Financial Companies have registered significant growth in recent years both in
terms of number and volume of business transactions. NBFCs started in a small way in the
sixties and the seventies and tried to serve the needs of the savers and investors whose needs
remained unfulfilled by the Banking system. In the eighties, there was virtually a boom, when
entrepreneurs suddenly woke up to the tremendous possibilities offered in an economy
chronically affected by the massive paucity of funds and a growing realization of enormous
resource mobilisation capacity offered by the capital market. However, most of these
new-borns ignored that rendering financial services was a complicated and demanding business,
involving the continuous raising and deployment of funds in a judicious manner and involved
the consistent identification and entry into newer and optimally lucrative areas of financial
returns. Along with the growth of Indian economy, NBFCs have also grown gradually into
institutions that can provide services similar to that of commercial banks in the country.
The growth of NBFCs in India was more pronounced in last two decades. Several factors have
contributed to the growth of these institutions. Their tailor made services, customer-orientation,
minimum procedures and simplicity, speed of operations, etc. have attracted more and more
customers to them. The monetary and credit policy followed in the country in the recent past has
left a section of borrowers outside the purview of banking system and these NBFCs increasingly
hatred to these sections. Comprehensive regulation of the commercial Banks and the absence or
less rigorous regulations over NBFCs have also contributed to the phenomenal growth or the
latter in terms of heir numbers, clientele deposits and Net Owned Fund (NOF).

However, most of these companies possessed neither the inclination nor the mental and attitudinal
ability to acquire these traits. A host of factors such as the erosion of margins due to over
concentration of blue chip companies, a high rate of default by lessees, severe problems in
sustaining consistent and adequate utilisation of resources, sales tax and turnover tax levied on
lease by respective state government and dubious accounting practices by some companies, all
combined in an unholy alliance to sound the death knell for most companies in this budding
industry. This rapid growth in the business of NBFCs also brought in its wake the need for
effective regulatory action to protect the interests of investors.

The Reserve Bank has started regulating the activities of NBFCs with the twin objectives of
ensuring that they subserve the financial system efficiently and do not jeopardise the interest of
depositors. In the backdrop of general sickness in the real estate market and some of the industrial
activities coupled with steep decline in the value of some of the unquoted shares, the NPAs of
NBFCs have registered an upward trend. The profitability of NBFCs has generally come under
strain due to mandatory provisioning requirements against NPAs. The provisions in the RBI Act
which, till recently were considered inadequate to deal with the growing number of weak and

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