A Reversal Of Many Past Moves

Traditionally, the focus of RBI regulation has been limited to the acceptance of deposits and related matters. The legislative intent was aimed at moderating the deposit mobilisation of NBFCs and thereby providing indirect protection to depositors by linking the quantum of deposit acceptance to net owned funds (NOFs).

In 1992, based on the recommendations of the A C Shah Committee, the RBI widened the definition of regulated deposits, introduced registration for NBFCs with NOFs of Rs 50 lakh and above, and issues guidelines on prudential norms.

1995: The Expert Group headed by P R Khanna recommended a comprehensive supervisory system for NBFCs.

1996: RBI freed interest rates for NBFCs complying with its directives. Registered equipment leasing and hire purchase finance (EL/HP) companies complying with credit rating requirement and prudential norms had no ceiling on the amount of deposits they could raise. Their SLR requirements were reduced to 12.5 per cent from 15 per cent. Registered loan/investment companies complying with credit rating requirements and prudential norms could raise deposits upto twice their NOFs.

RBI set up a Working Group under K S Shere to examine the issues involved in the suggestion of the Supreme Court to examine the need for the creation of a separate instrumentality for regulation and supervision of residuary and other NBFCs and extension of deposit protection scheme.

1997: The Government of India promulgated an ordinance, subsequently replaced by the RBI (Amendment) Act, effective January 9, 1997. Compulsory registration was enforced with entry norms stipulated at Rs 25 lakh of NOFs.

May 1997: The CRB Capital Markets scam broke out bringing into limelight various issues including the need for stronger supervisory mechanisms for NBFCs and deposit insurance.

1998: RBI introduced new regulatory framework for NBFCs which placed a tight ceiling on public deposits linked to credit rating, and reintroduced interest rate cap of 16 per cent, tightened liquidity requirements and capital adequacy ratio. While the industry did call for closer monitoring of the sector, it expected the Reserve Bank of India to play a more developmental role. Instead, what the Reserve Bank of India has effectively done is reduce its own workload by simply trying to reduce drastically the number of players in the industry.