Self-Regulation For Leasing Firms

The Reserve Bank of India has cleared the setting up of a self-regulatory organisation (SRO) for hire purchase and leasing companies. The role of the SRO will be taken up by the Association of Leasing and Financial Services Companies (ALFS), which is in the process of evolving a code of conduct, rules and regulations that will be submitted to the RBI for approval.

The move has important ramifications for the industry which has gone into a limbo ever since deposit taking was linked to credit rating according to the January 2 guidelines. Once the SRO is formed, it will take charge of certification of companies based on their capacity to repay deposits and conduct primary audits, similar to the role currently being played by rating agencies. This implies that mandatory credit rating by external agencies may be done away with and instead, the ability of NBFCs to service deposits will be determined and monitored by a professional body within the SRO.

"The SRO will function as a quasi-regulatory authority, which will be governed by a separate body of professionals. All NBFCs will have to become a member of the SRO, follow the ethics given in its code of conduct and carry on activities in the interest of their depositors subject to the RBI guidelines," said Mahesh Thakkar, executive director of AL&FS. However, it would take around a year for the SRO to shape up, said Thakkar. In the interim, AL&FS has suggested that NBFCs with a net worth below Rs 5 crore should be exempted from credit rating.