NBFCs under RBI`s lens

MONETARY POLICY 2008-09/ POLICY AND THE FINANCIAL SECTOR

The trigger for the review, is that several of these NBFCs are highly leveraged and use short-term sources to fund their activity. The central bank will take a fresh look at norms for capital adequacy, liquidity and disclosures and issue revised instructions by end May, 2008.

Systemically important non- deposit taking NBFCs are those that do not accept public deposits and have assets of Rs 100 crore and more.

In 2006, the regulatory guidelines covering the prudential norms for SI-NBFCs and banks' relationship with them were put in place. The RBI has been monitoring these NBFCs and banks' exposure to them.

Till a few years back, the NBFC sector was not highly regulated but with their assets increasing, the RBI is continuously introducing more controls.

Explains an industry watcher, "Many NBFCs borrow for the short term at a cheaper rate and lend for longer term at a higher rate which results in an asset-liability mismatch."

There has been increasing interest in setting up NBFCs in general and by banks (ICICI Bank, HDFC Bank ) and foreign banks. Since the RBI takes several years to give branch licenses to foreign banks, they are using the NBFC route to grow their retail businesses.

NBFCs offer products/services which include margin funding, leasing and hire-purchase, corporate loans, investment in non-convertible debentures, IPO funding, small ticket loans and venture capital. Banks prefer to set up NBFCs because the cost of operations is lower.