Policy review for NBFCs on the anvil

Norms for deposit-taking NBFCs need a fresh look, says RBI.

In a move that could force changes in the way a large number of non-banking finance companies (NBFCs) operate, Reserve Bank of India (RBI) Deputy Governor V Leeladhar today said it was time to review the policy regarding companies that accepted deposits from the public.

While maintaining that deposits accepted by finance companies were not significant and did not pose any systemic risks, Leeladhar said, "The time has come to think of only allowing banks to take deposits from the public. It's time for a fresh look."

Existing RBI guidelines allow both banks and NBFCs to accept deposits from the public. At present, there are around 380 NBFCs, which have been granted a certificate to accept public deposits.

"Taking into account the declining number of deposit-taking NBFCs, declining trend of public deposits held by NBFCs, strengthening of regulatory prescription in case of NBFCs-ND-SI (non-deposit-taking NBFCs) and RNBCs (residuary non-banking companies), a low level of NPAs (non-performing assets) and a relatively low level of bank borrowings by the sector, the potential systemic risk from this segment is low at this point of time, even as the process of consolidation is gaining momentum. In these circumstances, at the appropriate stage, the proposal of restricting public deposit-taking activities only to banks may have to be taken up for consideration," Leeladhar said at a seminar on banking organised by the Indian Merchants' Chamber and the Institute of Chartered Accountants of India.

At the end of March 2007, deposits of NBFCs were estimated at Rs 24,665 crore, of which deposits with deposit-taking NBFCs, other than RNBCs, were Rs 2,043 crore, accounting for 8.3 per cent of the total public deposits of NBFCs. Deposits with RNBCs amounted to Rs 22,622 crore.

Leeladhar said the business model of RNBCs had become non-viable and a new business model needed to be evolved for them.

Speaking at the seminar on consolidation, Leeladhar said all mergers in the banking sector had to be based on business consideration.

Asked about the absence of mergers and acquisitions (M&As) in public sector banks, Leeladhar said the enabling framework had been put in place and any decision had to be board-driven.