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Non-banking finance companies (NBFC) have objected the stringent provisioning norms that were proposed by the Reserve Bank of India (RBI) and have argued that they are deprived of the benefit that banks enjoy. The RBI had suggested that NBFCs should be treated at par with banks so far as NPA classification is concerned.
Currently, NBFCs need to classify an asset as non performing if the borrower defaults for 180 days. The NPA classification criterion now has been fixed at 90 days, same as banks.
NBFCs have argued that this will hit them hard for two reasons. One that their borrowers generally come from unorganised and informal sections and there are some difficulties in terms of borrowers repayment due to various issues like fuel cost increase or insurance etc. However, this doesn’t essentially translate into default. Secondly NBFCs don’t get any tax benefit on their provisioning books unlike the banks.
However, if RBI insists on tightening the provisioning norms to 90 days then it should allow NBFCs to use SARFAESI act like banks and implement the norms in the span of three years than prescribed two years in the draft norms, FIDC said.
Tier 1 Capital
FIDC in its representation to RBI said that existing tier-1 capital ratio to be maintained in view of difficulties in raising equity. The RBI in its draft norms had prescribed the tier-1 capital to be raised to 10% from existing 7.5%. For Captive NBFCs it was raised to 12%.
They have argued RBI in last four years have consistently increased total capital adequacy ratio (CAR) from 10 to 15% because of which NBFCs are consistently raising capital for last three years. “To raise any further capital, the NBFCs will perforce need to absorb the capital already raised, exhibit appropriate returns to their stake holders before being able to access the capital market,” FIDC’s representation said.
It further suggested if RBI wants to increase tier-1 capital ratio to 10% then RBI should lower the risk weightage in productive and low risk assets such as construction equipments (CE), commercial vehicles (CV) to 50% from existing 100%.
Deregistration of small NBFCs
The RBI in its draft norms said that the NBFCs having asset size less than Rs 25 crore need not be registered with RBI and also should be out of regulatory ambit of the central bank as they don’t create any systemic risk. FIDC argued that 70% of NBFCs will be deregistered and will be thrown out of the business at no fault of theirs and urged RBI to maintain status quo on the same.