De-registration of small NBFCs will hurt financial inclusion: Finmin

Written by Arun S | New Delhi | Updated: Jan 21 2013, 07:20am hrs
Coming to the aid of around 9,000 non-banking finance companies (NBFC) with asset size below Rs 25 crore facing de-registration and even closure following the proposed RBI norms the finance ministry has opined that the central bank should retain them under its regulatory ambit.

The ministry is also of the view that if the RBI, in its final guidelines, directs these small NBFCs to de-register till they attain the threshold of R25 crore asset size, the regulator should also issue appropriate notifications, allowing these small NBFCs to continue their existing business, such as auto financing, official sources told FE.

The ministry is also against deregulation or de-recognition of NBFCs as it will not only curtail the operations of the NBFCs, but also harm the financial inclusion programme. If they (the RBI) have limitations regarding supervising the total 12,300-odd NBFCs (of which around 9,000 are with an asset size of less than R25 crore), they may exempt these small NBFCs from registration. However, the RBI should direct them to submit elaborate reports regularly and conduct random checks of their operations, an official said.

Simultaneously, the RBI should work on a stronger supervisory mechanism for the sector and put in place an elaborate system for capturing and analysing data from all the NBFCs, the sources said. The RBI should also look at bringing out size-wise uniform accounting norms and financials reporting rules for different categories of NBFCs, they added.

The ministry is holding a meeting on Monday on the issues arising out of the RBIs new draft norms with top industry representatives and the Finance Industry Development Council, which is a self-regulatory organisation formed by NBFCs registered with the RBI. The move to de-register small NBFCs will be one of the main points of discussion. Following the report submitted by the Usha Thorat-led working group, the RBI on December 12 had issued draft norms.

FIDC has already sent their representation on the draft guidelines to the RBI earlier this month.

This (de-registration of NBFCs) shall take us back to the pre-1997 era of unregulated entities engaged in financial activities, which could once again encourage mushrooming growth of such high-risk entities. It is perhaps a one-of-its-kind scenario where the smaller players want to be registered and regulated, but the regulator wants them to be outside the ambit of regulation," said Raman Aggarwal, director (member managing committee), FIDC.

He said small NBFCs, once de-registered, shall be denied bank lending, because one of the requirements of banks is that the NBFC should be registered. As a consequence, the most likely source of funding for such NBFCs would be public deposits, which in itself may cause more problems, he said.

Besides, deregistration will also cause more complications for NBFCs. According to a panel set up by the ministry of road transport and highways, in case of vehicles financed, the lien in the vehicle registration certificate shall be marked only in favour of banks and registered NBFCs, Aggarwal pointed out.

Further, police, courts and tax departments demand RBI registration certificate as a mandatory requirement to accept applications submitted by NBFCs, he said, adding that, therefore, the norms on asset size for being registered should be made mandatory only for new entrants.

The proposed RBI norms say that while deposit-taking NBFCs will continue to be registered and regulated irrespective of their size, non-deposit taking NBFCs with less than R25 crore-asset size need not be registered or regulated as they do not pose any systemic risk. It also would not prevent small innovative start-up companies from entering into financial activities, the RBI said.

The RBI has also said that NBFCs will not be allowed to take deposits unless they have a mandatory credit rating, adding that those unrated deposit-taking NBFCs, which are currently unrated, will get a years time to obtain a rating or else will not be permitted to take fresh deposits or renew the deposits they already have.

Industry experts point out that it is not possible for NBFCs lesser than R25 crore-asset size to get investment rating and, therefore, the proposed RBI guidelines indirectly impact both deposit- and non-deposit taking NBFCs. The RBI cited lack of resources to regulate so many small NBFCs, which the ministry has recognised as a challenge.

The new draft norms of RBI say that existing non-deposit taking NBFCs with asset size below R25 crore, but which intend to continue to be registered, are required to notify the central bank within three months of the new directions a road map on how they are going to increase their asset size to R25 crore or above within two years.

Those with asset size of below R25 crore should also apply for a fresh certificate of registration within six months from the date of achieving the asset size threshold, the RBI said.