Easing Nbfc Pains

The RBI had previously dictated that only NBFCs rated better than A should be able to access public deposits. That would have left no more than 700 companies in the fray out of an estimated 3,000 which were eligible under earlier RBI norms to raise public deposits. Such a savage cut would have led to a quick drying up of primary credit at a considerable economic cost. The new norm, allowing all NBFCs with an investment grade rating, tries to expand the number of NBFCs eligible to accept deposits and thereby not drastically curtail credit. For the same reason, the decision to allow more time to regularise deposits in excess of the new eligibility norms will be welcomed.

 

But two jarring notes remain. One is that though unrated companies have been prohibited from raising fresh deposits, they have been permitted to renew maturing deposits. This goes against the regulators basic logic of cutting the public off from unrated NBFCs. There is no difference between fresh deposits and maturing deposits reinvested. Again, uniformity in application should require that unrated companies too should be given a three-year timeframe, like those allowed to conform to the new deposit raising limits, to either qualify for raising deposits or refund all public deposits.

The second note of concern is that no relaxations have been offered on account of interest rate freedom. In the earlier guidelines, the RBI had slapped an interest rate ceiling of 16 per cent, knocking off in one stroke the substantial deregulation of interest rates in the NBFC sector achieved over the past two years. This is an anomaly that militates against the total interest rate deregulation in all other financial sectors. Now that RBI has calibrated the industrys deposit taking capability to ratings, it should remove the physical ceiling on interest rates. There is a space for NBFCs which, because of their low overheads, are able to pay more and are also able to monitor their assets cheaply because of having their ears close to the ground. If they cannot do what they are good at, then they stand effectively banned altogether.