3 Identities Likely For Nbfcs

The Reserve Bank of India (RBI) is considering a move to divide the non banking finance companies sector into three sub sectors.

While the hire purchase and leasing finance companies are being mooted as a business distinct from other non-banking finance companies(NBFCs), the remaining industry is being bifurcated into two: the "small" NBFC sector with net owned funds of less than Rs 5 crore and the "large" NBFC sector for the net owned funds of more than Rs 5 crore.

Large NBFCs will be subject to direct supervision of the RBI, a self regulatory mechanism is being mooted for the smaller NBFCs, sources close to the NBFC advisory council said.

 

The distinction between leasing and hire purchase companies on the one hand and NBFCs on the other has been a major, long-standing demand of leading NBFCs in the southern region, most of whom are in the business of leasing and hire purchase. In recent years, these companies have suffered because of the tough regulatory measures that the central bank has announced for NBFCs as a whole.

According to sources, if 60 per cent of the business of a company comes from leasing and hire purchase then it will be considered eligible for classification as a hire purchase and leasing finance company. Typically, a majority of the NBFCs dabble in investment activities, stock broking, housing finance etc.

Much of the recent defaults that led to the RBI coming down heavily on the industry with tough norms, have been in businesses that were not in leasing and/or hire purchase, sources said. But the RBI norms have led to "strangulating the companies more than actually help, " an industry observer pointed out, saying even hire purchase and leasing companies have started to default now (as as result of the measures).

The RBI is also, after a few sittings of the NBFC advisory council, thinking about delinking credit rating from deposits (taking) for those NBFCs whose net owned funds are less than Rs.5 crore. Such entities will constitute the "small NBFC" category.

Those NBFCs whose net owned funds exceed Rs.5 crore will, classifed as "large NBFCs" however, still have to go by the norms laid down by RBI under its direct supervision.

For the smaller NBFCs, who constitute the majority of the industry, a Self Regulatory Organisation (SRO) is being thought of. Details of its organisational and functional structure are still a matter of debate. "It will be atleast a year or two before the SRO can start functioning," says a leading NBFC while talking to Business Standard.

Meanwhile, the industry has reiterated its demand for status quo ante i.e., to go back to the situation and rules as prevailing in December 1997. Credit rating was mandatory but not linked to deposits. Depending on the general health of the company deposits were permitted - ten, seven or five times net owned funds. This could be an interim measure until the task force set up the Finance Minister Yashwant Sinha comes up with its recommendations.