Suave Nbfcs Soften Rbi

While I do not agree in principle with the modifications of January 31, 1998, I have great empathy with the RBI. While observers can legitimately argue that the flip-flop policies of the RBI indicate that it does not know its own mind, the issue is not so simple. I recall with some sadness how in May 1993, cap in hand, I had to announce the backing off from the salutary measures announced on NBFCs in April 1993. The NBFCs have their ways of pressurising the central bank.

While thoughtless noises are made from time to time that regulation and supervision of NBFCs is best undertaken by a body other than the RBI, it must be recognised that a separate authority will have even less capability than the RBI to deal with the NBFCs. It sounds ridiculous but some hot-headed NBFCs had been considering the possibility of moving the courts on the ground that NBFCs should have unfettered rights to raise deposits. Of course, we have the country cousins of NBFCs, viz., the residuary non-banking companies (RNBCs) arguing that their activities should be determined by the interests of the agents, the employees and the depositors in that order! To say the least, the NBFCs sector is a Hobbes Leviathan where life is nasty, brutish and short and the rule of law follows the Thrasymachus principle in Platos Republic that Justice is the Interest of the Stronger.

 

Now let us look at the RBI relaxations of January 31, 1998. The central feature of the January 2, 1998 measures was that access to public deposits was to be contained within strict limits. Hitherto, there was no sub-limit on public deposits but an overall limit of 10 times (which was removed in July 1996 for the best performers). While one can understand the tactical relenting on January 31, 1998 on the strict limits set out by the RBI for public deposits, the setting of a limit of 0.5 times the net owned funds (NoF) for the investment grade A- is, in my view, dangerous. This has opened the door for further agitation. Sure enough, the NBFCs will soon argue that the limit of 0.5 times the NoF is not reasonable as it does not provide for a critical mass, and the RBI will find it difficult to ward off representations for higher limits.

The allowing of an extended period up to December 31, 2000 for repayment of excess deposits is far too liberal. While one does see the rationale that excess deposits would have been contracted for three years before January 2, 1998, and therefore, it would be in order to give time for these deposits to run off, what is not explicable is the relaxation that these companies will be allowed to accept/renew public deposits subject to a reduction of the excess by one-third each year. This means that the larger the excess deposits a company has over the norms, the more permissive the regulation. Hence, there is a bias in favour of imprudent companies. The fact that a company is allowed to accept/renew deposits in excess of stipulation is anathema. Three years in the NBFC sector is a long time and the RBI is taking great risks by a such a benevolent policy. Furthermore, allowing unrated or below investment grade companies to renew maturing deposits is just totally inexplicable as it appears to imply that an infringement is allowed to continue. In my view, allowing unrated or below investment grade companies to continue taking deposits is clearly a retrograde step.

The provisioning norms for hire purchase/leased assets had been already diluted in the January 2, 1998 measures and the further dilution of the measures by considering an NPA only in relation to each account of a borrower is an extremely imprudent measure. This merely opens up the scope for manipulation of accounts and the NPA criteria gets totally diluted. The RBI has been conned into relaxing the past dues from six months to 12 months for lease rentals and hire purchase instalments before treating such assets as NPAs and the further relaxation of January 31, 1998 renders the NPA concept totally irrelevant.

The industry associations had been agitating for a relaxation of the asset and income classification of 60 per cent for hire purchase and equipment leasing companies and the RBI has done well not to have relented. We cannot have companies undertaking other activities and then masquerading as hire purchase/equipment leasing companies.

There has been some criticism that the caveat emptor in the January 2, 1998 regulations for depositors to be circumspect is a reflection of the confidence of the regulatory/supervisory mechanism. This is grossly unfair. No system of regulation/supervision can protect depositors if they put their money in totally unviable units. Again, the bluff has to be called of NBFCs placing defaults at the doors of the RBI, and companies making such statements should be subject to a punitive penalty of a prohibitory order. Companies must either shape up or ship out and blaming the regu-lator/supervisor is not a third option.

While the July 31, 1998 measures relate to NBFCs proper, the RBI would progressively need to tighten the norms for RNBCs and nidhis. These group of companies have got away with inherently imprudent operations and they cannot remain islands of privilege in the firmament of the NBFCs.

Finally, while the measures of January 31, are a partial backing off by the RBI from the salutary measures of January 2, one hopes that it is only a Dunkirk i.e., a tactical retreat and that the RBI will continue its efforts to bring about a well functioning NBFCs sector. Handling NBFCs is the most punishing portfolio in the RBI and I should know!.