New Prudential Norms For Nbfcs Notified

In a bid to protect individual deposits held by non-banking finance companies, the Reserve Bank of India yesterday tightened operating norms governing their operations. The RBIs measures include re-introduction of a limit on the quantum of deposits that can be raised by NBFCs and a 16 per cent cap on the interest rates offered by them.

The Reserve Bank has also tightened capital adequacy and investment concentration norms. However, it has relaxed income recognition and liquidity norms and relaxed entry barriers to becoming a hire purchase company.

The quantum of deposits raised by an NBFC has been linked to its credit rating. NBFCs with net owned funds of less than Rs 25 lakh and a rating below A have been barred from accepting deposits. The RBI has also put a ceiling on brokerage fees at two per cent of the deposits raised for tenures between one and five years. Reimbursement of expenses has been capped at 0.5 per cent.

NBFCs can now offer a maximum of 16 per cent interest, but no maturity slabs have been specified. The RBI has ordered NBFCs offering interest higher than 16 per cent to roll back rates immediately.

Under the new guidelines, an equipment leasing and hire purchase company rated AAA can raise deposits up to three times its net owned funds. An AA company can raise deposits up to twice its net worth and an A company can raise deposits equal to its net worth. In the case of loan and investment companies, the limit is double, equal to, and half the net owned funds, respectively.

An RBI press note said NBFCs with a credit rating below A cannot accept public deposits. Deposits held in excess of the prescribed limit are to be regularised by December 31, 1998.

For the purpose of regulation, the RBI has classified NBFCs into three groups. The first category consists of NBFCs which accept public deposits. The second covers NBFCs which do not accept public deposits but are into loans, investments, hire purchase and equipment leasing. The third includes NBFCs which do not accept public deposits but have acquired shares or securities in their own group/ holding/subsidiary companies worth not less than 90 per cent of their total assets and are not trading in these securities.

NBFCs which accept public deposits will be subject to all the new guidelines. However, NBFCs which do not accept public deposits will be subject to limited supervision. Only NBFCs accepting public deposits will have to submit half-yearly returns.

Capital adequacy norms have been tightened. NBFCs will now have to achieve 10 per cent by March 31 and 12 per cent by March 31, 1999. However, income recognition norms for leasing and hire purchase companies have been relaxed. Assets will now be termed non-performing only if lease rentals and hire purchase instalments are overdue for 12 months and above.

Although credit concentration norms have not been changed, investment concentration norms have been tightened. Thus, investment in a single company or group cannot exceed 15 and 25 per cent, respectively, of the NBFCs net owned funds. This is aimed at ensuring that deposits are not used to fund promoters stakes .

Further, the credit offered by an NBFC to a single entity, combined with its investment cannot exceed 25 per cent of its net owned funds. The cap for credit- investment in a group is 40 per cent of the net owned funds.

The RBI has relaxed the liquidity-asset requirement. It will now be applicable to newly defined public deposits. The ratio will have to be 12.5 per cent on April 1, and 15 per cent on April 1, 1999. Earlier, this was applicable to all deposits, with the time-table being January 1, 1998 for 12.5 per cent and April 1, 1998 for 15 per cent.

The entry barrier to becoming a leasing and hire purchase company too has been relaxed. An NBFC is now eligible to be classified as a leasing and hire purchase if not less than 60 per cent of its assets and income is from equipment leasing and hire purchase activities taken together. Earlier, this was 75 per cent.

All new NBFCs incorporated after January 9, 1997, will be provisionally classified as loan or investment companies for a period of one year. The classification will be reviewed thereafter.