The Hindu Business Line : Will RBI ploy effectively curb RNBCs?

Sahara India Financial Corporation Ltd, Lucknow, and Peerless General Finance & Investment Company Ltd, Kolkata, the two leading Residuary Non-Banking Companies (RNBC), will have to park 100 per cent of their deposits in RBI-approved securities effective April 1, 2006 going by the roadmap set down by the central bank in 2004.

The companies have been reportedly intimated by the RBI.

"From the quarter April to June 2006 and onwards this limit would stand abolished and RNBCs would not be permitted to invest any amount of the aggregate liabilities to the depositors (ALD) as at the second preceding quarter, as per their discretion. Thus, from the quarter April to June 2006 and onwards, the RNBCs will be required to invest entire amount of ALD as at the second preceding quarter, in the directed investments."

At present, 90 per cent of the liabilities (deposits) are placed in government securities, guaranteed bonds issued by the PSUs with 10 per cent of the deposits or 10 times the Net Owned Fund (NoF), whichever is lower allowed to be placed freely at the discretion of the board.

The RBI is slowly but surely ring fencing the two RNBCs to assure depositors of their principal, if not interest. There are four RNBCs, of which one based in Andhra Pradesh is closed, while a second one is a tiny outfit.

As of March 31, 2003, public deposits with Sahara India Financial Corporation and Peerless were put at Rs 15,058 crore (accounting for 99.98 per cent of public deposits) which should have grown further over time. The fresh constraint should not hobble the working of the two outfits as they can borrow money from banks against securities they hold though it is a different matter if banks will be enthusiastic lenders. But will the RBI ploy effectively curb RNBCs? It will hurt as garnering public deposits may not be the best option.

The Report of the Working Group on Development Financial Institutions scripted by Mr N. Sadasivam was perhaps the first to provide detailed information on RNBCs and their distinct, if not scary, style of operations. The RBI has been recently acting tough though they are still short of linking deposit collection to Net Owned Funds, a rule applicable to all other NBFCs.

The Report had said: "A striking feature of the deposits raised by RNBCs is the leeway given in the regulations to mobilise deposits without any restriction on the quantum of public deposits with reference to Net Owned Funds. In effect, as long as RNBCs deploy 80 per cent (presently 90 per cent) or more of their deposits in mandated securities, they are free to increase their deposits to any level. This is of course subject to the continued compliance with the laid down prudential norms, including CRAR."

With 100 per cent deposits expected to be captured by mandated paper from April 1, 2006, the RBI is reducing the discretionary space of the boards of the two companies.

These companies have been overly dependent on public deposits though they can access bank funds. The Report says, "traditionally these deposits are in different categories in terms of collection process and maturity. In the large two RNBCs, around 24.9 per cent of the deposits are in the form of daily deposits, 50.9 per cent in other recurring deposits and the balance 24.2 per cent in fixed deposits."

Parking 100 per cent of deposits in RBI-approved paper does not preclude possible depreciation when interest rates drop. The Working Group had suggested conversion of RNBCs into equipment leasing, hire purchase or loan and investment company.

In the process, RNBCs will not be able to freely access public deposits. Sensibly, the RBI has been discouraging NBFCs to go for public deposits.

The restrictions placed on NBFCs in accepting public deposits are: Equipment leasing or hire purchase companies are allowed to raise public deposits up to 4 or 1.5 times their NoF depending upon their CRAR and availability of minimum investment grade credit rating for their fixed deposit programme. For loan and investment companies, the entitlement for public deposits is 1.5 times the NoF subject to their having minimum CRAR of 15 per cent and minimum investment grade credit rating for their fixed deposits.

RNBCs need not lead their exceptional lives.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Minimum capital for pension fund managers may be fixed at Rs 25 cr

Will RBI ploy effectively curb RNBCs?

Rupee firms up; securities weak

Canara Bank engages i-flex, IBM

Tata AIG Life hikes capital by Rs 60 cr

IRDA relaxes norms for flood loss survey

Mumbai floods: Insurers getting carried away?

Need to deepen debt market stressed

UTI Bank, Visa launch mobile recharge facility

BoI ties up with Nabard arm to fund projects

SBI's community service to focus on healthcare, education

RBI to raise Rs 8,000 cr

SBI opens small enterprises credit cell at Coimbatore

SBI staff union protest

RBI favours mergers to strengthen urban co-op banks