The Hindu Business Line : Banks can invest more in NBFCs

Highlights
More leeway for banks to fund NBFCs
NBFC funds for capital market pruned
Foreign banks and NBFCs owned by them are treated as one entity

Mumbai , Nov 30

The Reserve Bank of India has given more room for banks to lend to and invest in non-banking finance companies (NBFCs) in its revised draft guidelines issued today.

In the earlier draft guidelines released on November 3, banks were allowed exposure of up to five per cent of their net owned funds in single NBFCs and up to 40 per cent to a group of NBFCs.

As per the revised guidelines, this ceiling has been increased to 10 per cent for a single borrower; the base has been changed to the banks' capital funds from their net worth. This is a relaxation because capital funds, which include tier I and tier II capital, constitute a larger base. Net owned funds are capital funds not including banks' investment in subsidiaries.

Mr Anand Sinha, Executive Director of the RBI, said that this was one of the suggestions that the apex bank had received from NBFCs and banks in response to the first draft guidelines.

The request for additional 5-10 per cent exposure for infrastructure has also been allowed.

The revised draft guidelines are open for feedback up to December 7. They will come into effect from April 1, 2007. Institutions that require more time for compliance can approach the Central bank by January 31, 2007 to indicate a timeframe, said Mr Sinha.

In the guidelines, the RBI has imposed prudential norms and prescribed a regulatory framework for non-deposit-taking companies (NBFCs-ND) that have a minimum asset base of Rs 100 crore (described as Systemically Important).

Mr Sinha said: "Banks should not use NBFCs as a delivery vehicle for seeking regulatory arbitrage opportunities or for circumventing bank regulations; the activities of NBFCs should not undermine banking regulations."

For Systemically Important NBFCs-ND, the RBI has prescribed capital adequacy ratio of 10 per cent.

It has also introduced a stipulation on the exposure norms of NBFCs-ND.

These NBFCs can lend up to 15 per cent of owned funds to any single borrower and up to 25 per cent to any group of borrowers.

"The composite limit for lending and investing should not exceed 25 per cent of owned funds to a single party and 40 per cent to a single group of parties," Mr Sinha said.

With regard to NBFCs that are subsidiaries or affiliates of foreign banks, the RBI has extended the prudential regulations to the group as a whole.

"NBFCs owned by foreign banks in India or by the group to which the foreign bank belongs will be treated as part of the local conglomerate. They will be subjected to prudential regulation as a group."

But if the overseas parent bank or group does not have management control, then these entities will not be subject to group prudential regulation, provided the RBI is satisfied of the same.

On restricting the stake of banks, including foreign banks, in NBFCs-ND up to 10 per cent of paid-up capital, Mr Sinha said: "This is because in our general framework under the Banking Regulation Act, no bank in India is allowed to have a banking subsidiary within the country."

More Stories on : NBFCs | RBI & Other Central Banks | Financial Policy

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