Rbi Set To Roll Back Curbs On Nbfcs Today

The Reserve Bank of India (RBI) will announce a relaxation in guidelines for non-banking finance companies (NBFCs) today. NBFCs will be given two-three years to bring down their fixed deposit portfolios in line with the newly specified norms. Credit rating norms will also be eased.

Sources within the RBI revealed that the norms for leasing and hire purchase companies may also be relaxed. This follows pleas by industry officials that it would not be possible for NBFCs to suddenly increase their lease and hire purchase business from the present level of 51 per cent of total assets to the stipulated 60 per cent as market conditions are slack.

 

RBI officials said the central bank is advising smaller companies informally to repay their deposits and register themselves as non-deposit accepting NBFCs. These companies can re-apply for registration as deposit accepting NBFCs later if they are in a position to accept public deposits.

The RBIs decision to relax NBFC norms follows repeated representations from individual NBFCs as well as industry bodies.

In its new notification issued on January 2, the RBI had greatly reduced the amount of funds NBFCs could raise through fixed deposits, linking it to the companys credit rating. NBFCs rated below investment grade (A) had been banned from accessing public deposits.

Industry associations have argued that the dramatic tightening of eligibility norms for companies to raise public deposits, based on their ratings, and the inevitable shakeout would cause distress in the financial market.

Regarding the regularisation of deposits in excess of the RBI stipulated limits by December 31, 1998, sources said the RBI was willing to consider an extension of the deadline to accommodate a phased drawdown of excess deposits.

Initially, the RBI had asked NBFCs to regularise their positions by December 31, 1998. Then, on January 9, the RBI said NBFCs need not compulsorily repay deposits by December 31, 1998 if these deposits were accepted before January 2, 1998.

The RBI softened its stand after industry officials said the stringent stipulation of one year would cripple the industry. The Association of Leasing and Financial Services Companies (ALFS) had pleaded that of the 3,000-odd deposit taking NBFCs which qualify under the net owned funds criteria, as many as 2,600 would immediately cease to have access to public deposits.

Besides, the rating process takes anywhere between 3-6 months, and in the meantime the companies would suffer if their access to deposits was curtailed.

The ALFS pointed out that the maturity period of these deposits ranges between one and five years, making it difficult for NBFCs to prepay the requisite volume over a one year as it could result in legal complications.

Besides, NBFCs may not be able to unwind their assets to repay their deposit liabilities.

Finally, a recall of loans at this stage could trigger off a chain reaction through the rest of the financial sector and result in widespread panic.