The task force, instituted by finance minister Yashwant Sinha, is expected to finalise its report by the end of this week. The RBI deputy governor SP Talwar is one of the members of the task force.

Sources said that the task force has mooted the idea of setting up a single self-regulatory organisation (SRO) immediately by merging the three existing associations. "To start with, the SRO will work under the Reserve Bank of India for two years and then it will become an independent regulatory body like the SEBI," a source familiar with the working of the task force said.

The task force wants the Association of Leasing and Financial Services, Equipment Leasing Association of India and Hire Purchase andLeasing Association of India to merge and form a single SRO.

"Once it becomes independent, the RBI will retain minimal supervisory powers to regulate NBFCs. The central bank will retain powers to inspect the finance companies just to check whether any irregularities have taken place. This is a grey area and all administrative and legal aspects are being worked out," the source said.

Currently, the Reserve Bank supervises the functioning of the NBFCs through a department of non-banking supervision which reports to deputy governor Talwar.

According to sources, the task force wants to ensure that the SRO is a feasible idea from the financial stand point. "The NBFCs should be able to raise the required funds to run a regulatory body. Only after we are convinced that the body is financially viable, we will allow it to function independently," a source said.

Two other important areas that the task force has had a close look into are delinking NBFC's deposit mobilisation programme from credit ratings andprotection of depositors. "The task force is in favour of the dilution of the RBI norm of linking an NBFC's deposit mobilisation limit to its rating," sources said.

As far as the protection of depositors' interests is concerned, the RBI has put its foot down on the issue of deposit insurance being offered to NBFC depositors.

The task force has also recommended involvement of the respective state government machineries to regulate the NBFCs. "Since RBI does not have the manpower and machinery to police the vast sector, state governments should chip in to regulate the NBFCs," sources said.

INSIGHT
RBI must not loosen control over NBFCs

The genesis of the idea for an SRO for NBFCs was the prudential norms imposed by the RBI following a series of defaults by NBFCs, which means that an SRO would probably ease the pressure on member companies and allow borderline cases to operate. Instead of regulating their members, these associations could be more interested in furthering theirexistence.

Take for example the recent demand from one such association to exempt NBFCs with a net worth of Rs 5 crore and below from credit rating; when the reality is that these NBFCs are the most likely to default. Under no circumstances should the Reserve Bank let go of its control over the NBFCs, not even to a small extent.