The Hindu Business Line : Cap public deposits in RNBCs

IN not placing a cap on public deposits accessed by the Residuary Non-Banking Companies (RNBC), the RBI has skipped an important recommendation of the report of the Working Group on Development Financial Institutions.

The group, set up by the RBI, has favoured a limit on public deposits garnered by RNBCs linked to net-owned funds (NoF) to provide some comfort to the public depositors.

To start with, the working group preferred a cap limited to 16 times the net-owned funds of the RNBCs with a corollary for a phased reduction to 4 times or 1.5 times NoF as applicable to other types of NBFCs. Of the four RNBCs, Sahara India Financial Corporation Ltd, Lucknow and Peerless General Finance & Investment Company Ltd, Kolkata account for 99.98 per cent of public deposits at Rs 15,058 crore as of March 31, 2003.

The working group felt "continuation of RNBCs in the current mould is not desirable because the scope that exists now for unrestricted growth of deposits in RNBCs poses serious concerns relating to the depositors' interest." At least 80 per cent (now 90 per cent) of the liabilities are placed in government securities, guaranteed bonds issued by the PSUs and the rest with 20 per cent (now 10 per cent) of the deposits or 10 times the NoF, whichever is lower, allowed to be placed freely at the discretion of the board.

The working group noted that as on date, the two RNBCs carry, "to a large extent within their discretionary portfolio, assets in the form of real estate, receivables from Revenue Department (TDS/ Advance Tax) and investment in shares."

An important concern of the group is over any possible depreciation in the investment portfolio with interest rates moving down over the last three years. "Given an adverse movement in interest rates in the future, portfolio values would face significant depreciation.

The losses on this score may not be manageable if the portfolio of investments grows without restriction," says the group. The RBI has tightened the norms on the assets side of the balance sheet while being soft on liabilities, which may not be prudent regulation.

RNBC is an NBFC clone and regulations allow the four RNBCs to tap monies from banks, FIs and corporates though in practice they have only gone for public deposits.

The group favoured transforming the four RNBCs into NBFCs for equipment leasing, hire purchase, loan and investment company with limits on taking public deposits, which the NBFCs attract.

RNBC is a funny creature with the central bank having granted them the freedom to take public deposits without any limits while the financial markets have been quite uncomfortable with their existence. Equipment leasing or hire purchase companies are allowed to raise public deposits up to 4 or 1.5 times their net-owned funds depending upon their capital adequacy ratio and availability of minimum investment grade credit rating for their fixed deposits; for loan or investment companies, the limit on public deposits is 1.5 times the NoF subject to a minimum capital adequacy ratio of 15 per cent and minimum investment grade credit rating for their fixed deposits.

RNBCs are free to price their deposits while other NBFCs cannot offer more than 11 per cent.

The anomalies favouring RNBCs could strain the regulator in the future.

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