Bank lending to NBFCs to be reviewed

MID-TERM REVIEW OF ANNUAL POLICY 2004-05/ FINE-TUNING CREDIT DELIVERY

In keeping with the international practice, the Reserve Bank of India (RBI) today directed non-banking finance companies (NBFCs) to phase out accepting public deposits.

In addition to this, the regulator has agreed to review regulations on bank lending to NBFCs. Initiating the first phase of revision, the central bank has permitted banks to extend finance to NBFCs against second-hand assets financed by them, provided suitable loan policies duly approved by the banks' boards are formulated.

The RBI will hold discussions with NBFCs in regard to their plan of action for voluntarily phasing out of their acceptance of public deposits and will review the regulations on bank's lending to NBFCs as appropriate, it said in the mid term review of the annual policy.

Public deposits are the only source of resources for some NBFCs, said the chief finance officer of a leading NBFC. Restriction on the acceptance of public deposits will discourage potential entrants from entering this sector and also lead to the consolidation in the sector, he added.

However, revision of the regulations on banks lending to NBFCs will enable companies to enhance their liquidity position, said the CFO.

The RBI stance is a welcome move as it is in keeping with the international standards said the CEO of another leading NBFC. This move will encourage financially strong NBFCs to raise resources from institutional sources or by accessing the capital market, he added.

At present, NBFCs accepting public deposits are regulated and supervised by RBI. Over a period, the dependence of the NBFCs (other than RNBCs) on public deposits as part of their overall resources has declined, said the RBI.

The number of deposit taking NBFCs has also reduced from 996 in 1997 to 577 by September 2004. The deposits of NBFCs declined from Rs 6,500 crore in 2000-01 (17.2 per cent of their total liabilities) to Rs 3,400 crore in 2003-04 (12.7 per cent of the total liabilities).