However, the panel has said that the twin criteria of assets and income for determining the principal business of a NBFCs need not be changed.
Accordingly, the financial assets of an NBFC should be 75% or more (as against more than 50%) of total assets and income from these financial assets should be 75% or more (as against more than 50%) of total income.
An incremental approach may be adopted to graduate to the revised criteria and milestones may be specified for NBFCs so that they do not slip back in fulfilling the criteria within the three-year period, suggested the Thorat panel.
If they are unable to reach the asset and income thresholds respectively within the three-year period, they should be deregistered by the RBI as an NBFC through a public notification. Deposit-taking NBFCs failing to achieve the criteria in three years time should not be allowed to accept fresh deposits or renew fresh deposits thereafter. They should pre-pay deposits within a timeframe and convert to non-banking non financial companies, said the Thorat panel. The panel has suggested that the existing non-deposit taking NBFCs should be given three years to comply with the revised definition of principal business.
Some of the recommendations by the committee like the norm for registration of NBFCs wherein the requirement of the financial income and financial asset of 75% each from the existing 50:50 is laudable., said Sanjay Chamria, vice-chairman & MD, Magma Fincorp. Total financial assets, cash and bank deposits maturing within 30 days, government securities, treasury bills eligible for repos, investments in money market mutual funds or investments in money market instruments maturing within 30 days which are kept for liquidity purposes and advance payment of taxes and deferred tax payments, may be deducted from the numerator and denominator.
For the purpose of computing income, the three-year moving average could be used.
The liquidity issues facing NBFCs were debated by the members of the working group. Members noted that while minimum CRAR for NBFCs is higher than that for banks, in times of turbulence this may not be sufficient to deal with potential liquidity stress. Hence, the issue of liquidity risk for NBFCs remains inadequately addressed. Apart from a quarterly return, no other regulatory requirements have been stipulated for NBFCs-ND below asset sizes of R100 crore.
However, liquidity issues are different for different subsets of NBFCs. A one-size-fits-all approach may not be appropriate. The larger NBFCs, especially IFCs, have very long-term assets and comparatively short-term liabilities, thus carrying ALM mismatches and possible refinancing risk in their balance sheets.
ALM mismatches for NBFCs which are into retail financing may not be as marked as in the case of IFCs. Retail focused NBFCs are often able to reduce the maturity of their assets through securitisation and bilateral assignments. An analysis of the liquidity mismatches for 177 large NBFC-ND-SIs shows that more than 60% have positive mismatches in their ALM in the first two buckets.
The panel has also suggested that the need for greater disclosure by the NBFCs must be carefully balanced against the cost of such disclosure and the risk of creating information overload for stake holders.