Closing the gap

Non-Banking Finance Companies protest too much in claiming that recent Reserve Bank of India regulations on prudential and corporate governance norms will ‘stifle’ the sector. Tighter regulation of non-bank entities has been in the offing since the global credit crisis of 2008. As the new rules have been drawn mainly from the Usha Thorat Committee Report of 2011, NBFCs have had plenty of time to prepare for them. The good news is that the RBI has now overtly acknowledged the useful role that NBFCs perform in delivering last-mile credit to borrowers neglected by the banking system.

Many facets of the new rules in fact represent a relaxation of the earlier proposals. While the RBI has brought non-performing asset (NPA) recognition norms for NBFCs in line with those for banks at 90 days, it has provided a liberal three-year window for firms to comply. A one-time accommodation for older loans has also been allowed, to ease the way. A similar three-year period has been allowed for NBFCs to increase standard asset provisions from 0.25 to 0.40 per cent of dues. The firms have also won time until 2017 to raise their core capital to 10 per cent. It is worth noting that all these norms have been made applicable only to NBFCs with an asset size of over ₹500 crore or those accepting public deposits, the two categories deemed to have a systemic impact. Given that the RBI’s intent of removing the regulatory arbitrage between banks and NBFCs has been quite clear for three years now, most larger firms have already brought their internal processes closer to these requirements. Yes, this adjustment may be difficult for firms lending to riskier segments such as micro-enterprises, micro-finance or used vehicle buyers, but their borrowers too may eventually fall in line, given that other funding sources are prohibitively expensive.

Having said this, there is merit in the NBFCs’ argument that while they are being made to comply with almost all the prudential norms that banks adhere to, banks continue to enjoy an unfair advantage over them in access to funding, accounting for risky loans and even in launching recovery proceedings against recalcitrant borrowers. Having reduced NBFC access to public deposits, the RBI should look to open up new modes of funding for the sector; reinstating priority sector status for the microfinance, agriculture and SME loan portfolios of NBFCs sold to banks would be a good move. NBFCs must also be empowered to use provisions of the Sarfaesi Act and debt recovery tribunals to recover their dues. That NBFCs should be granted the same tax benefits as banks on bad loan provisions and recoveries is a patently reasonable request and policymakers should allow it.

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