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Disciplining NBFCs
Far from being a bolt from the blue, the Reserve Bank's norms for non-banking finance companies (NBFCs) have been on the horizon for at least three years. NBFCs mushroomed in the first episode of reform.Thousands have come up, and some, even a year ago, offered 18 to 20 per cent interest to depositors, an obvious indication that many of them were into high risk lending. Besides, every corporate worth the name floated an NBFC and ensured captive finance, thus bypassing denial of bank funds on grounds of prudence. The lackadaisical approach to NBFCs was in marked contrast with the Reserve Bank's tight supervision of the commercial banks. Norms for NBFCs were overdue. The Reserve Bank has acted after fairly extensive damage has been done. Crisil, Icra and CARE have already downgraded the ratings of several NBFCs. Financial norms must be enforced, as required by the Reserve Bank, within a reasonably short space of time. This is necessary to separate the prudent NBFCs from fly-by-night operators. True, the
majority of NBFCs have an asset-liability mismatch: they have lent out at very high interest rates, and for fairly long periods, their high cost short term deposits. They expected the deposits to be continually renewed. This assumption has proved to be flawed with depositor confidence waning. The sudden requirement to return deposits in excess of that allowed by the norms will jolt NBFCs. Borrowers are unlikely to return their loans. This appreciation had led the rating agencies to pull their punch while lowering ratings of NBFCs. But if borrowers are in no hurry to return funds in a milieu in which lending interest rates have declined, the chances are that NBFCs have sticky loans on hand. In other words, if NBFCs securitise their loans, there will be buyers only at fairly heavy discounts. Postponing the evil day will not do.That will only see the emergence of dubious NBFCs to take the place of those that go belly-up. The Reserve Bank has rightly disallowed NBFCs with a rating lower than A from accepting
public deposits. The bar also applies to mini NBFCs with net owned funds of less than Rs 25 lakh (should not the cut-off point be higher?). Limits on NBFC loans to and investment in a single group are on the high side; this will deter portfolio (risk) diversification. The Reserve Bank will, hopefully, hone the norms in the not too distant future.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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