Noble But Nebulous

But even in prescribing these norms, the RBI has at best been ad hoc. The logic of the normative basis adopted of the cap on deposit rates and criteria of multiple of net owned funds for deposit raising is not at all evident. Currently, none of the larger companies is offering as high a rate as 16 per cent which has been fixed as the new ceiling. The minimum requirement of an A grade rating essentially means that all the small players are as good as dead. Only 535 of the registered NBFCs have been rated. Of these, just 213 are rated as A or above and qualify for deposit raising. While the shrinking of the NBFC sector is a clear fallout, there are a lot of grey areas which the RBI will have to look at closely while implementing these measures. For instance, in the case of dual ratings for the same company, which rating would apply? As in the case of MS Shoes, will it just lead to a bickering between two credit rating agencies? Amidst all the stringent regulations that have been laid down, there is

 

conspicuous silence on the mechanics of monitoring the end use of funds. Even with the new limits on funds raised, there is no transparent system yet in place to find out where exactly the funds have flowed.

What is most significant is that the new norms effectively shift the burden of safekeeping of public deposits from the RBI to the credit rating agencies. After the implementation of the Khanna Committee report, the RBI was to evolve its own system of rating a finance company. Since the quantum of public deposits a company can raise will now be linked directly to the credit rating, it is the rating agencies which will now be critical to the entire operations. This is not necessarily desirable considering how credit rating agencies work the world over. Credit rating, even though based on objective norms, is fundamentally judgmental. The agency, after all, gives an opinion. A regulator is mandated to regulate. It is worth recalling that in the case of CRB, the company was downgraded much after the scam broke out.