The Hindu Business Line : Those NBFCs again

Speaking at a banking seminar in Mumbai last week, Mr V. Leeladhar, Deputy Governor, Reserve Bank of India, mentioned the possibility of not permitting Non-Banking Finance Companies (NBFCs) to accept deposits. He, however, hastened to add that the matter was at the discussion stage and that no policy had been firmed up so far. That a deputy governor chose to air a view on as important a subject as NBFCs suggests the possibility of some change in the not-too-distant future . The issue is: does the sector need another regulatory churn after the one it underwent in the late 1990s?

After the RBI ramped up its regime of regulating the NBFCs in the mid-1990s in response to the series of scandals that cost depositors dear, the sector has grown pretty much smoothly. For one, the number of deposit-taking NBFCs (NBFC-Ds) has nearly halved by March 2008 from 710 five years ago. The central bank attributes the declining numbers to the exit of many deposit-taking NBFCs from the business since 2003, when regulations were further streamlined. For another, the volume of deposits too has declined, though marginally. Data, however, show a growing concentration of deposits at one end of the spectrum, with three Residuary NBFCs accounting for more than 90 per cent of the public deposits held in 2007, up from around 87 per cent four years earlier held by five RNBFCs. At the same time, the share of RNBFCs in the total assets of NBFCs declined four percentage points at end-2007 to 32 per cent. At the seminar, Mr Leeladhar reiterated the RBI’s desire to help NBFCs improve their asset base and the appeal the central bank had made to NBFCs to move out of the deposit-taking business if the regulatory costs outweighed the benefits of such activity. The Aggregate Deposit Liability (ALD) of the RNBFCs rose 33 per cent to Rs 22,622 crore, a fact that convinces the central bank of the unviability of the current “business model” of the RNBFCs. From Mr Leeladhar’s speech it is evident that the RBI wishes the NBFCs saddled with such ALDs moved out of the deposit-taking activity through various options that regulations now permit. If his sideline hints are any indication, one wonders if the RBI is contemplating a removal of the deposit-taking privilege from NBFCs through fiat.

Is such an extreme action warranted? By all accounts the NBFCs seem well regulated; their deposits are minuscule in comparison to bank deposits. If the current environment requires some NBFCs to rethink their “business model”, that process should be left to the entities concerned unless the RBI’s strict regulatory scrutiny has spotted a potential systemic crisis.

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