NBFCs capital adequacy norms tightened

By: BHARAT RATNA Reserve Bank of India has raised the Capital adequacy norms with immediate effect to prevent the financial irregularities and make the non-banking financial Companies http://www.financialexpress.com/section/Companies/95/(NBFCs) safer. The Reserve Bank of India (RBI) on Monday (2nd June 2008) asked non-deposit taking NBFCs to raise the minimum Capital to Risk-weighted Assets Ratio (CRAR) from 10% now to 12% with immediate effect and further to 15% with effect from April 1, 2009. NBFCs operate almost like banks, except for running a checking account, or accounts, where money can be easily withdrawn by writing checks, or using a debit card. Although the capital adequacy norm for NBFCs is 10%, compared with 9% for a regular bank, they do not have any statutory liquidity ratio (SLR)—the amount of money banks are required to invest in government bonds— and cash reserve ratio (CRR)— the amount of money banks are required to keep with RBI—requirements. For banks, the SLR and CRR requirements are 25% and 7.5%, respectively. In April 2008, Mr V Leeladhar, Deputy Governor of RBI said that Public deposits held by these companies have come down to Rs2,043 crore in March 2007 from Rs5,035 crore in March 2003. The NBFCs that are registered with RBI are: • • • • (i) equipment leasing company; (ii) hire-purchase company; (iii) loan company;

(iv) investment company.

V. Leeladhar, Deputy Governor, RBI With effect from December 6, 2006 the above NBFCs registered with RBI have been reclassified as • •

(i) Asset Finance Company (AFC) (ii) Investment Company (IC) (iii) Loan Company (LC)

Some of the important regulations relating to acceptance of deposits by NBFCs are as under: • i) The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.

ii) NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 11 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests. iii) NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors. iv) NBFCs (except certain AFCs) should have minimum investment grade credit rating. v) The deposits with NBFCs are not insured. vi) The repayment of deposits by NBFCs is not guaranteed by RBI. vii) There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits.

• • • • •

Unveiling the draft guidelines for the systemically important entities, RBI said it has reviewed the disclosure norms for such NBFCs and that these NBFCs should make additional disclosures in their balance sheets from the year ending March 31, 2009. These will relate to CRAR, derivatives deals entered during the year, risk exposure to derivatives, including both qualitative disclosure (risk management policies and systems in place) and quantitative disclosure (notional principal amount, credit exposure, marked to market positions); exposure to realty sector, both direct and indirect and the maturity pattern of assets and liabilities. In view of the possibilities of leveraged investments, and asset-liability mismatch resulting from use of short-term sources to fund NBFC activities, the Reserve Bank of India has further decided to introduce a system of halfyearly reporting for these NBFCs. The half-yearly returns would comprise three parts. They are statement of structural liquidity in format ALM, statement of short term dynamic liquidity in format ALM, and statement of interest rate sensitivity in format ALM. To enable the above class of NBFCs to fine-tune their existing MIS, such reporting would commence with effect from the period beginning September 30, 2008 and the reporting frequency would continue to be half-yearly for the year ended March 31, 2009. However, the frequency of supervisory reporting of the structural liquidity position will be monthly, with effect from month ending April 30, 2009, the central bank said. “The Reserve Bank of India wants to control the gearing of such non-deposit taking NBFCs with asset size of Rs 100 crore and above. Basically, they want to ensure that the borrowing capacity gets reduced, as there are systematic risks that sometimes occur. Hence, they have decided to increase the capital adequacy minimum capital to risk weighted assets ratio. With the frequency of reporting getting increased, there will not be any kind of manipulation in the books, which would ensure greater transparency in the working of such

NBFCs,” said Mahesh Thakkar, director-general of Finance Industry Development Council. “I think the central bank feels there is an overexposure to sectors like real estate. There is overtrading/ over lending in certain sectors like derivatives and stock markets, which the central bank wants to keep an eye on. Overall, the draft guidelines are as per what we expected. This would help in better transparency for the working of NBFCs,” he said Role of Company Law Board Where a non-banking financial company fails to repay any deposit or part thereof in accordance with the terms and conditions of such deposit, the Company Law Board (CLB) either on its own motion or on an application from the depositor directs, by order, the non-banking financial company to make repayment of such deposit or part thereof forthwith or within such time and subject to such conditions as may be specified in the order. As explained above the depositor can approach CLB by mailing an application in prescribed form to the appropriate bench of the Company Law Board according to its territorial jurisdiction with the prescribed fee.

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