New Reserve Bank norms may force over 35,000 finance firms to shut shop
Our Banking Bureau
MUMBAI, January 4: Over 35,000 non-banking finance companies (NBFCs) will be forced to close shop immediately as they will not be able to access public deposits under the RBI's new norms for NBFCs announced on Friday. The Reserve Bank has barred smaller NBFCs with net owned funds (NOF) of less than Rs 25 lakh from raising public deposits.The second-rung NBFCs, meanwhile, have started shifting focus from fund-based to fee-based activities. With loan delinquencies on the rise and the fixed deposits market getting increasingly difficult to access, these companies are getting out of the leasing and hire-purchase business. Times Guaranty, for instance, which recorded huge losses during 1996-97 after providing for doubtful assets, has decided to focus only on fee-based activities in 1997-98. The move has paid off and the company made a smart recovery by posting a net profit of Rs 2 crore during the first half of the current fiscal. The small companies -- which came into existence to capitalise on the earlier
advantage that NBFCs had of raising public deposits many times their NOF -- will now be left with no choice but to return all public deposits by December 1998. Alternatively, they will have to bring in capital to attain the minimum stipulated NOF of Rs 25 lakh. "The Reserve Bank's norms banning NBFCs with NOF of less than Rs 25 lakh from raising fixed deposits will lead to an accelerated shakeout in the industry", said R Sankaran, chairman of Ind-Global Finance. Fly-by-night operators will have to flee finance street. "Most of these companies were floated with the sole intention of leveraging their borrowing capacities and raising deposits from the public to fund shady business activities", said a senior executive at an NBFC. "If finance companies are serious about the business they are in, they will bring in additional capital in order to hike their NOFs and thereby raise their borrowing powers", adds Sankaran. However, even if NBFCs do bring in the necessary capital, they will have to attain at least a
single-A rating from credit rating agencies in order to raise funds through the fixed deposits route. Even those companies with an A- rating have been banned from raising public deposits. However, even while curbing NBFCs' overall access to public deposits, the RBI has relaxed the definition of public deposits and excluded debentures and inter-corporate deposits from it. The Reserve Bank has directed `A' rated NBFCs to stop accepting deposits with immediate effect or renew existing deposits in case they are downgraded. They have also been asked to report the downgradation to the Reserve Bank within 15 days. They will be required to reduce the amount of excess public deposits to the appropriate ceiling which it is entitled to accept after the downgrading of the credit rating within a period of one year or such further period as may be extended by the Reserve Bank.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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