RBIs draft norms for NBFCs may come across as softer than those proposed by the Usha Thorat Committee last year, but its clear the regulator wants a tighter grip on these intermediaries. The general idea seems to be to keep a closer watch on the larger players, especially those that are mobilising money from the public, and not worry too much about the smaller lot. As the regulator points out, since many of the companies are highly leveragedthey borrow a fair amount from the bankstheir well-being is important for the health of the financial system. The fact that theyre offering more complex products also seems to be a matter of concern for RBI. So, the regulator will be asking for a lot more informationNBFCs with assets of R1,000 crore and more will need to furnish data not just as is required under clause 49 of SEBIs listing norms but also to disclose a fair amount of balance sheet data and even declare off-balance sheet items. Also, an NBFC that wants to access deposits would need to get itself rated, not a bad move even if rating agencies arent always ahead of the curve when it comes to spotting trouble.
The regulator understandably wants stronger institutions and it was always evident that capital requirements would be upped. However, while the Thorat Committee had suggested a core or a Tier-1 capital of 12%, RBI has been more lenient lowering it to 10% except in some special cases; those that are captive NBFCs with 90% of assets related to the parent, those that operate in the gold loans space or a sensitive sector, need to have Tier-1 capital of 12%. That seems to be fair and in any case most of the larger companies are fairly well-capitalised so the new norms shouldnt bother them. In fact, many of the listed NBFCs also provide more for standard assets than stipulated now and would not find it difficult to increase the provisions to 40 basis points of the outstanding amount from March 2014 (from 25 basis points now). According to a Kotak analysis, most NBFCs reported a Tier-1 capital adequacy of over 15% in September 2012, well above the new norm. Where some NBFCs might feel the pinch is when classifying loans as toxicmuch as it is with banks, an NBFC loan too will need to classify loans as non-performing if interest is overdue for 90 days rather than the 180 days at present. The idea, no doubt, is to be able to read the signals of any major distress in assets sooner rather than later, allowing for better damage control. This, the Kotak analysis suggests, will lower FY13 pre-tax earnings by 7-10%, which is a small price to pay. Given how important it is to get a true picture of delinquencies in the current environment, the regulator should probably have given NBFCs just two years to fall in line rather than three years, even if it means a larger hit to earnings.