It would have been smooth sailing if the option of deposit insurance were available to it. But well-managed NBFCs are an exception among the thousands that have mushroomed under liberalisation.

The committee had to rule out insurance. It has focussed on getting NBFCs registered, and recommended that deposit acceptance by unregistered units be made a cognisable offence. The weeding out process will also be facilitated by the increase recommended in the minimum capital requirement to over Rs 25 lakhs. This should help the proposed dedicated supervisory authority to oversee the working of NBFCs.

The committee has also sought to improve the quality of assets that NBFCs acquire with deposits from the public. First, it has proposed a ceiling on exposure to real estate and shares. This is sensible: rating agencies frown if such exposureexceeds 25 per cent of deposits. Second, it has stipulated that investment in liquid assets (principally government paper) be doubled to 25 per cent. Third, it requires NBFCs to hold 25 per cent of their reserves in marketable securities.

These reforms will add to the liquidity of NBFCs and mitigate the problem of asset-liability mismatch which gets aggravated whenever there is a rush to withdraw deposits. Liquidity should help assuage panic.

But the Vasudev Committee is far from confident that after the reforms proposed by it, NBFCs will become the darling of investors. Over-ruling the Reserve Bank, the committee wants to delink deposit collection from rating -- because rating downgrades trigger a run on NBFCs!

True, the committee has proposed that unrated NBFCs must have a capital to risk-weighted asset ratio (CRAR) of 15 per cent; but this enables NBFCs to garner six and a half times their capital by way of deposits.

The public cannot ignore the liberal gearing, and will insist upon rating,especially since the committee has identified rating as the villain that exposes the weakness of NBFCs. Risk-averse investors and banks alike will shy away from unrated NBFCs. The committee's labours to build confidence by upgrading the quality of NBFC assets seem slated to go in vain.

The proposed increase in liquid assets will pare the average yield of the portfolio of assets of NBFCs; besides, lending interest rates are easing under competitive pressure. NBFCs will find the going tough. On the cards is a lowering of interest payable on fixed deposits by NBFCs. This should force all but (voluntarily) AAA rated companies on the retreat.