The Hindu Business Line : Are NBFCs being hounded out?

A MICRO-FINANCE institution or even a non-governmental organisation can borrow money through the ECB (external commercial borrowing) route, but not NBFCs (non-banking financial institutions), which have been doing just micro credit the last half century.

Talk to any NBFC official, the anger, bitterness and frustration over being hounded out of the economy comes through clearly. In the last four years the 700-odd NBFCs, though duly registered with the Reserve Bank of India, have been crying in vain for some support from the government and the regulator. They wanted to be able to go to the Debts Recovery Tribunal for recovery of their dues. They wanted to be covered by the Sarfaesi Act, so that they could get the powers to seize hypothecated assets from delinquent borrowers. They pleaded for treating the provisions for NPAs (non-performing assets) to be treated as a tax-deductible expenditure. They got none of these, although the other financial intermediary — the bank — has all this.

In fact, the NBFCs have had to face stricter regulations than banks. They have, for example, a capital adequacy norm of 12 per cent against 9 per cent for banks.

Then, on January 28, came a more unpleasant surprise. In a letter, the RBI asked the NBFCs to "prepare a time-bound action plan (emphasis original) for a gradual phasing out of deposit taking activities."

The RBI had said that NBFCs would be "encouraged" to phase out public deposits and the NBFCs had assumed that this was to be "voluntary". But, obviously, the RBI had other ideas.

The letter read: "Internationally, acceptance of public deposits is generally restricted to banks, and non-banks fund their operations from alternative sources."

But this may not be the full picture. For, the former RBI Governor, Mr S. Venkitaramanan notes that "The fact is that non-banking finance institutions are active in other economies. They accept deposits in developed countries as well as in some developing countries, like Malaysia. The existence of thrift societies in the US and housing societies in the UK is well-known" ( Business Line, February 28).

Elsewhere, he termed the RBI guidelines restricting deposit-taking by NBFCs "irrational" and said that the "RBI should appreciate what would have happened if one of the public sector banks, with a weak bottomline and high NPAs, had been prohibited from receiving fresh deposits, which is what was done to the NBFCs... "

But, today, deposit-taking is not being just restricted, it is sought to be stopped altogether. The NBFCs point out that protection of public deposits is through regulations and deposit insurance schemes. In the US, public deposits of thrift societies are protected by the Federal Deposit Insurance Corporation (FDIC). The initial capital to set up FDIC was provided by the United States Treasury and the 12 Federal Reserve Banks," points out a paper on "A case for NBFCs to accept deposits," prepared by an association of NBFCs. The paper points out that "thrift societies" have huge public deposits. For example, Washington Mutual has $160 billion.

But are public deposits essential for NBFCs? While it is true that all companies have reduced their dependence on public deposits, they want all their fund-raising options to be open. "This (public deposits) is a perennial tap for us and we do not want that closed," said Mr T. T. Srinivasa Raghavan, Managing Director, Sundaram Finance Ltd. He observes that there are times (unlike now) when public deposits are cheaper than some other avenues for raising money.

Mr R. Thyagarajan, Chairman of the Shriram group which has four NBFCs, says that it is essential that the government and the RBI understand that the role of NBFCs cannot be performed by banks. He notes that understanding the changing needs of small borrowers and financing them — the `frontier extension'— can be done only by the NBFCs and not the banks. Public deposits are needed to finance fresh loan products, while bank money will fund loan products that have taken off.

"We do not deserve to be treated like this," laments Mr M. Anandan, Managing Director, Cholamandalam Investments and Financial Services Ltd.

But why is the RBI keen on the NBFCs phasing out deposits? Industry leaders think the regulator simply wants to save itself some legwork. Today, the total public deposits with the NBFC industry is about Rs 18,000 crore. Of this about Rs 14,000 crore is with the Residuary NBFCs, such as Peerless and Sahara. The 700-odd `hire-purchase financing companies' have only about Rs 4,000 crore, and about 80 per cent of this is with some 20 companies. Does the RBI feel it is a needless hassle for itself to be regulating such a small universe?

This guesswork gets some corroboration from the RBI's letter of January 28. It says: "It is suggested that companies holding `A' Category certificate (deposit-takers) could be converted into non-deposit accepting (`B' Category) by surrendering the present `A' Category certificate. While such a conversion might not hamper their lending activities, it would considerably reduce the number of regulatory requirements such companies have to comply with."

But when the NBFCs do not mind complying with regulations, what is RBI's problem is what everybody in the industry is asking.

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