Overregulation affecting liquidity, hurting sector: NBFCs tell PM Modi

Backed by industry body Assocham, some key non-banking financial company (NBFC) players on Wednesday met Prime Minister Narendra Modi to bat for easier regulatory norms, highlighting how “over-regulation” is affecting their liquidity and “crippling” the sector.

However, the Prime Minister’s Office (PMO) told the industry executives to bring all relevant parties — finance ministry and Reserve Bank of India — to the table, a senior member of the industry said.

On behalf of the NBFCs, Assocham submitted a deta­il­ed memorandum to the Pri­me Minister, highlighting key issues and suggestions, along with demands that are aimed at improving the flow of credit to NBFCs and ease liquidity situation. NBFCs complained to the government that the “fund raising activity still remains highly restricted, creating a fund crunch.” 

“Regulation with the objective of aligning it with that for banks is leading to overregulation where NBFCs are being treated like banks. This is hampering the growth of the unique NBFC model of lending, which has successfully withstood the adverse scenario such as the 2008 global crisis and the recent liquidity crisis,” the memorandum of demands stated.

Among those who attended the meeting included Dinanath Dubhashi, managing director and chief executive, L&T Finance Holdings, Raman Aggarwal, chairman, Finance Industry Develop­ment Council, and Umesh Revankar, managing director of Shriram Transport Finance Corporation. 

In the meeting with the Prime Minister, the liquidity situation was discussed at length, sources said. “The sector needs a series of steps to boost sentiments. Following the IL&FS crisis, all the commitments (in the form of commercial papers) have been rolled over and there has not been a single default. We need steps to ease fund raising,” a person, who was part of the meeting, said. 

Proposing a dozen liquidity relief measures, Assocham said in its memorandum that the RBI should consider providing liquidity window for NBFCs or housing finance companies (HFCs) against sale of secured loans “by taking appropriate margin on these secured loans”. It further asked for a refinance window from the National Housing Bank and the RBI at a higher rate to “help restore confidence in the sector”.

“MUDRA [Micro Units De­v­e­lopment and Refinance Ag­e­ncy Bank] norms for refina­n­cing NBFCs need to be cha­n­ged to make them viable and acceptable to small and medium NBFCs. This shall also give a tremendous boost to the growth of MUDRA in meeting its desired objectives,” the memorandum said. 

Another key demand was to allow “systemically important” NBFCs to accept public deposits, sources said. Only 100 of over 11,000 NBFCs are allowed to accept public deposits by the RBI now. 

NBFCs, which have a critical mass, should be allowed to convert into banks with little hassles, the industry told the PM, sources said. “Though, prevailing regulation does not prohibit NBFCs from converting to banks, the process and rigour is a long and complicated one, and licences are not forthcoming,” the memorandum further said.

The industry body sought a different treatment to application from NBFCs, which want to convert to a bank from any other banking license application. 

“Since NBFCs are already subject to both onsite and off-site inspection and regular submission of returns to the RBI, due diligence of NBFC Application for a banking licence should be less time-consuming,” the memo said.

Other key demands
 

• Doing away with tax deduction at source on interest income and lease rentals on movable assets 
• Withholding tax exemption for masala bonds to be extended by another year 
• Allowing NBFCs access to the CRILC database, Aadhaar and GST databases 
• All housing finance companies should be permitted access to NHB refinance facility 
• Minimum Holding Period (MHP) should be reduced to three months for loans having a maturity of 2-5 years 
• Risk weights for NBFCs should be reduced
• Maintain the RBI’s existing Asset-Liability Management norms till normalcy is restored