Saturday, November 04, 2006

Policy shift on NBFCs likely

The RBI may be close to putting a ban on foreign and local banks operating through NBFCs (Non banking finance companies). The aim is to plug the opportunity available to banks take advantage of regulatory arbitrage. Such arbitrage chances exist due to the fact that NBFCs unlike banks are not bound by strict norms on raising funds and its end use besides the light supervisory touch on such firms.

The attempt by banks, especially foreign ones, to skirt the branch licensing norms by lending to retail consumers through their NBFCs is worrying. The concern arises from the fact that these NBFC companies have sourced funds from banks to fund capital market transactions, which is feared could have systemic impact.

There are severe restrictions on opening bank branches by foreign banks with the annual cap in India being 20, which is in excess of India’s commitment to the WTO.

On the cards are norms on capital adequacy ratio for non-deposit taking NBFCs. The non-deposit taking NBFCs are not constrained by any rules on capital which are applicable to deposit taking NBFCs. With no fetters on capital raising, they normally leverage themselves by about 6 to 10 times borrowing through commercial paper. In recent times, it has been noted that some of them had raised money through CPs (Commercial Paper) and then lend to their high net worth clients to play the stock markets.

Hence the unease of the RBI and move to regulate them tightly.