Financial Daily from THE HINDU group of publications
Tuesday, Mar 14, 2006
Financial Daily from THE HINDU group of publications Tuesday, Mar 14, 2006 |
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RBI & Other Central Banks Money & Banking - NBFCs Web Extras - Stock Markets RBI panel for cap on capital market exposure of NBFCs Our Bureau
Exposure defined All bank finance (advances and investments) to investment companies and stock broking companies should be considered as bank's capital market exposure, except where financing is for of an SPV's participation in PSU disinvestments or its investment in the equity of infrastructure companies.
Mumbai , March 13 The Reserve Bank of India, as in the case of banks, may put a cap on the capital market exposure of Non-Banking Finance Companies (NBFCs). An RBI internal group, which finds that one of the routes through which bank credit can be routed to stock markets is through NBFCs, has suggested that the existing Rs 10-lakh limit in the case of bank credit to individuals (Rs 20 lakh if the securities are dematerialised) against security of shares, be prescribed for deposit-taking NBFCs as well. In its draft report released today, the group said all bank finance (advances and investments) to investment companies and stock broking companies should be considered as bank's capital market exposure, except where the bank finance is for financing of an SPV's participation in PSU disinvestments or its investment in the equity of infrastructure companies.
COMMERCIAL PAPERS
The group felt that there is a need for looking into the issue of non-deposit taking NBFCs raising unlimited amount of Commercial Papers (CPs) and playing in capital market. The group has suggested following options: (1) Treating commercial paper as a public deposit; (2) introduce capital adequacy ratio requirements for non-deposit taking NBFCs to limit the leverage of capital funds and (3) stipulate a gearing ratio i.e. borrowing as a multiple of capital funds as in the case of DFIs. It is also suggested that NBFCs can be subjected to a norm relating to their capacity to leverage by prescribing a debt equity ratio of an acceptable level. To begin with, these norms may be made applicable to all NBFCs with asset size of Rs 100 crore and above. The RBI may consider imposing a limit on the extent of bank finance that can be extended to NBFCs. This limit could be fixed at a certain percentage of the total capital of the bank. Alternatively, banks may not be permitted to take exposure on an NBFC if its debt equity ratio is larger than an acceptable level.
According to the report, some banks set up NBFCs to benefit from regulatory arbitrage. To address this regulatory arbitrage, the Group is of the view that the application of the framework of consolidated supervision to the parent bank and its NBFC subsidiary should be adequate as the prudential requirements on a group level cover the areas of capital adequacy, single and group borrower norms and exposure to capital markets. The group recommends that the framework of consolidated supervision may be applied even in the case of a NBFC promoted by a foreign bank under the automatic route and the branch of that foreign bank, even though the parent subsidiary relationship does not exist between the NBFC and the branch. The group felt that it is not possible to apply group concept in case of a NBFC subsidiary set up by a foreign bank without any branch presence in India. In such a situation, the foreign bank is not subjected to the regulation of RBI. The group, however, notes that the constraint can be reasonably addressed by the various recommendations relating to deposit taking and non-deposit taking NBFCs. The group recommends that in order to ensure a level playing field, the bank subsidiaries may also be permitted to undertake activities such as discretionary PMS etc, which are permissible for the other SEBI regulated entities to undertake.
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