NBFCs resist RBI norms

The domestic non-banking finance companies (NBFCs) are up in arms against the latest set of regulations issued by the Reserve Bank of India.

In a bid to tighten the regulations for systemically important non-deposit taking finance companies (NBFCs-ND) with an asset size of Rs 100 crore and above, the central bank, last week, said such NBFCs will have to maintain a higher capital to risk weighted to assets ratio (CRAR) of 12% as against 10% now, from April 1, 2009. The ratio would be further increased to 15% from April 1, 2010.

Though these guidelines are final and have been issued after a draft proposal was discussed by the industry, the representative body of NBFCs, the Finance Industry Development Council (FIDC), has now shot off letters to RBI seeking that the guidelines be relaxed. They have pleaded before RBI to reduce the 15% capital adequacy clause that they feel will make the NBFC business unviable.

A senior player in the NBFC sector told FE, ?This is just not acceptable. The central bank is being very harsh with NBFCs. This move will put a restriction on the borrowing capacity of NBFCs, which would definitely hamper their growth and bottomline.? The source said the industry is collecting views from the affected, ?systemically important? NBFCs and will meet the RBI governor or deputy governor in the next 10-15 days to discuss the problem.

In view of recent international developments, the risks associated with highly leveraged borrowings and reliance on short-term funds by some NBFCs to fund long-gestation assets, concerns have arisen regarding the enhanced systemic risk associated with the activities of these entities, RBI had said, explaining the rationale behind issuing the latest set of guidelines.

An FIDC representation to RBI said, ?The proposal to increase the CAR to 15% should be completely dropped, as the move will make the NBFC business untenable, in the current economic conditions.? ?The current business models of the NBFCs-ND are predicated on 10% CAR and taking it up to 12% with adequate time would be reasonable. Taking it to 15% would render their business unsustainable.?

The FIDC paper strongly opposes the fact that while non-deposit taking NBFCs should be brought on a par with deposit-taking ones at a CRAR of 12%, to take it to 15% would be extremely harsh and would severely impact the ability of non-deposit taking NBFCs to do any business in the next couple of years. Further, the council argued that any amendment in the areas, like CRAR, need to take into account the practical aspects of compliance requirement. Any capital raising will take at least six months, especially for listed NBFCs that will have to comply with Sebi guidelines for any further issue of capital.

?In the interest of the industry, it is only fair that NBFCs be given adequate time to fall in line with the new guidelines and also make the amendment compliable and practical,? the council requested.

RBI has also made it mandatory for NBFCs to submit asset-liability management (ALM) return on a monthly basis. Hence, the council has requested RBI to advise as to the time period that is available to the company after the close of the month for filing these returns.

Further, the circular requires NBFCs to furnish a structural liquidity return.

?We seek RBI?s advise as to whether only structural liquidity return has to be filed or all the returns, including short-term dynamic liquidity return and interest rate sensitivity return, has to be filed,? said the FIDC note. The note also submitted that the ceiling of 50% on subordinated debt, within the overall ceiling on Tier-II capital, should be removed.

?If this is done, it would help NBFCs shore up the CAR with less difficulty as the procedural complexities in issuing sub-debt are much less as compared to tier-I capital,? the source said.

The other issues that the council has put forth before RBI for consideration is on certain disclosures that are required to be made by NBFCs in their annual report, in terms of the maturity pattern of the assets and liabilities.

Now, NBFCs, from the regulatory perspective, should not have any problem in furnishing the particulars of the asset-liability mismatches with the regulator wherein confidentiality of the information is ensured.

However, by providing the information in the annual report, the information on the negative mismatches become public and makes NBFCs vulnerable as their bargaining capacity in terms of borrowing or lending of the funds stands on a weak footing. Hence, the council has requested the central bank to remove the stipulation that this should form part of the annual report.