NBFC supervision needs to be stepped up

The Reserve Bank of India (RBI) on Tuesday said the supervisory regime of non-banking finance companies (NBFCs) needed to be strengthened for a more robust assessment of the underlying risks.

“The key underpinnings while developing (new) products and markets will be to ensure that the process of disintermediation away from banks is genuine and the risks are clearly and transparently captured in a prudential framework in areas where both banks and NBFCs are involved,” RBI said in its annual report for 2009-10 released on Tuesday.

It added that inter-connected flows between NBFCs and other financial sector entities also needed close monitoring.

RBI has been taking efforts to tighten control over NBFCs, which are more loosely regulated than banks.

Any takeover or merger involving deposit-taking NBFCs now requires the prior approval of RBI. In addition, the management of the merged entity must comply with the ‘fit and proper’ criteria of RBI.

In its annual report, RBI also chided NBFCs involved in micro-finance for charging high rates while accessing cheaper funds from banks.

According to the banking regulator, there are 12 systematically important non-deposit NBFCs that are lenders with an asset size of at least Rs 100 crore engaged in micro-finance lending.

Many of them have agreements with private sector and foreign banks for outright buy-outs and direct assignments of loans for priority sector requirements that banks are subject to.

However, the end-borrowers do not get the benefit of low interest rates, as NBFCs are assigned the responsibility of managing the loans. Consequently, the borrower continues to pay the same rate of interest, which is as high as 23.6-30 per cent.

“The main sources of funds for these NBFCs are borrowings from banks and financial institutions. Most of them have received large amounts as foreign direct investment and many of them are now largely foreign-owned,” RBI added.