The central bank sent the modified proposal to the finance ministry on Monday along with a brief on its acceptance of the proposals made by the task force headed by special secretary (banking) in the finance ministry, CM Vasudev.

The RBI has also made it clear in its note to the finance ministry that the supervision of NBFCs will continue to be under the central bank. "There is no question of a self-regulatory organisation (SRO) coming up in the next few years. Supervisory activity will be seen by an executive director of the apex bank," sources in RBI said.

The central bank has also proposed a hike in the entry barrier for new finance companies by raising the minimum capital requirement (net-owned funds) to Rs 50 lakh from Rs 25 lakh. These companies will not be allowed to raise public deposits for the first two years.

The central bank has accepted the task force's recommendation on raising the capital adequacy ratio to 15 per cent from the present stipulation of 12 per cent gradually.

"We have proposed that large companies with net-owned funds (NOFs) of more than Rs 10 crore should continue to have their deposit ceiling linked to the credit rating. However, the medium and small companies can be exempted from linking credit rating to deposit mobilisation," an RBI source said. Finance companies with NOFs of less than Rs 25 lakhs will continue to have no access to public deposits.

The source added that the rationale behind the move is that the collapse of a large finance company affects a large investor base which is not the case for smaller companies. The task force had recommended that it would not be necessary to link the quantum of deposits to the rating, provided the rating is above the minimum investment grade.

The RBI has also accepted the recommendation to increase the liquid asset ratio, or SLR, to 25 per cent of public deposits. The central bank will also make a statutory provision that unsecured depositors will be given the first charge of these liquid assets.

The RBI plans to stipulate that NBFCs transfer 20 per cent of their net profits to a reserve fund. It will also make it compulsory for the finance companies to invest at least 25 per cent of such a reserve fund in marketable securities apart from the liquid asset securities already held by them.

The central bank has accepted the suggestion that it should statutorily be empowered to appoint depositors' grievance rederessal authorities with specified territorial jurisdiction. "It will be a quasi-judicial body," the source said. The procedure for the liquidation of NBFCs is proposed to be expedited by bringing it in line with the procedure available for banks.

The RBI has accepted the recommendation that it be vested with powers to direct an NBFC or a class of NBFCs to seek its prior approval before appointing its statutory auditors.

Insight

move on SRO a welcome step

The most sensible view that the RBI has taken is quashing the dreams of certain sections of NBFCs to form an SRO as that would have only made some NBFC associations unnecessarily influential. The NBFC associations have not yet demonstrated any sense of purpose except that of trying to get a good deal from the RBI and ensuring the survival of even inefficient companies. But the RBI seems to have capitulated on the point regarding exempting small NBFCs from linking deposits to credit rating. It is these small companies that are least capable of surviving in a competitive environment and are more prone to failure, thus carrying a greater risk of endangering depositors and the financial system.

Raising the statutory liquidity ratio for NBFCs will only increase the cost of disintermediation and eventually endanger the NBFCs further.