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| NBFC policy: Devil in the detail? |
| Somasekhar Sundaresan / Sep 12, 2011, 00:42 IST |
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A working group set up by the Reserve Bank of India (RBI) on non-banking financial companies has recommended a very progressive framework to regulate non-banking financial companies (NBFCs) but the path ahead can be treacherous and needs to be treaded upon carefully.
The working group on issues and concerns of the NBFC sector has recommended a strong focus on the big picture and refraining from regulating for the sake of it. The group has recommended that the RBI should exempt every NBFC with an asset size of below Rs 50 crores from registration with the RBI. Such an exemption would mean that such tiny NBFCs need not be bothered with having to comply with various statutory and regulatory requirements imposed by the RBI on NBFCs. The working group has also recommended that NBFCs with an asset size of below Rs 1,000 crores that do not access “public funds” (a term different and much wider than public deposits, and essentially meaning exposure to debt) also need not be registered with the RBI.
The central theme of the recommendations of the report is to focus on the big picture in regulating the NBFC sector, which is a segment in the financial system, which can do quite much of what banks can do. The approach also seems to be take away as many NBFC licences as possible, since once a licence is issued, an entity would pretty much be able to do everything that the licence entitles it to do. Towards this end, the working group says that NBFCs that do not accept public deposits and have an asset size of below Rs 50 crores should be “encouraged to de-register” with the RBI. If such an NBFC were to not de-register, the NBFC would have to apply afresh for a registration as and when its asset size exceeds Rs 50 crores.
Having narrowed down the scope of who would be regulated, the working group has also tightened the screws on change of control of NBFCs. Any change of ownership in excess of 25 per cent in an NBFC would now need RBI approval. So would any change of control and any restructuring such as a merger or a de-merger of an NBFC.
Current requirements of the RBI bring an extremely wide range of companies within the scope of the definition of the term “NBFC”. So long as more than 50 per cent of the assets of a company were financial assets, and more than 50 per cent of the income of any company were income from financial assets, such a company would be regarded as an NBFC. The working group has now proposed to enhance this threshold to 75 per cent - again a move that would ensure that only entities that really have the profile of a financial sector player would need to be within the remit of the RBI’s jurisdiction over NBFCs.
The active disinclination to have many NBFCs in the system is also writ large in a recommendation to give existing NBFCs three years to meet these requirements of a minimum 75 per cent of financial assets and minimum 75 per cent of income from financial assets. If a company registered as an NBFC that does not accept public deposits, fails to meet these criteria in three years, it would be de-registered as an NBFC. The report also says deposit-taking NBFCs that do not reach the standard of having more than 75 per cent in financial assets and income from financial assets should stop taking further deposits and should prepay existing deposits. However, the zeal to throw companies out of the NBFC space should be tempered with caution. Not having to register with the RBI is great. However, a company that is not required to register could legitimately require that it should be permitted to continue its existing operations, which avowedly fall outside the scope of regulation.
In other words, if the operations are such that income is materially not financial income, and assets are not materially financial assets, they should be capable of being continued without registering with the RBI. Of course, such an approach may pose systemic risks and the RBI should be tempted to intervene. Therefore, a reporting requirement without any compliance obligation should be conceived.
The devil will indeed be in the detail. In implementing the transition to the proposed policy, the RBI should work in close co-ordination with market players to understand the implications of each move. It need not accept all it gets to hear, but it will profit from openly listening to everything that has to be said.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.) somasekhar@jsalaw.com
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