The latest RBI regulations bringing non-banking finance companies (NBFCs) on par with banks flies in the face of several financial-inclusion measures, feels Chennai-based Shriram Group’s Group Director GS Sundararajan. In characteristic style, he is severely critical of the regulator’s move and explains why more thinking needs to go into making regulations for the non-banking finance sector. Edited excerpts:

What will be the likely impact of the new RBI regulations on NBFCs?

Overall, it is a completely retrograde step for small borrowers and small businesses. Due to the several changes in regulations, the cost of funds could rise by as much as 150 basis points. This will get passed onto the customer. Customers will borrow if it is viable for them or they will stop borrowing.

And if they do not borrow, GDP growth is not going to be there. If you give micro and small enterprises finance at reasonable rates, they will continue to grow. They are about 40 per cent of the economy on the GDP side.

Also, I see that NBFCs will continue to have higher non-performing assets (NPAs) because of which provisions will go up.

How does the RBI bringing down the asset classification norms from 180-days to 90-days impact the sector?

The Usha Thorat Committee report on regulating NBFCs is three years old. There have been several representations to the RBI from NBFCs as well as from several trade associations (transport associations, for example). They have pointed out that the cost of borrowing will go up and repossessions will happen on the 60{+t}{+h} day, which is not right.

The NPA norms are very relevant for large corporates, where if they default on the second or third interest payment they will be an NPA. But for a guy whose cash flow is so irregular and who suffers a cascading impact of all the delays in payments by those who are above him in the value chain, this does not make sense. If he does not get his payment in 60 days, he will get it in the next 60 days and he pays back.

The RBI’s rationale is this will be a problem only once, and says that we can educate the customer and make them pay on time. It is not about education or accounting…it is a fact that those guys need more tolerance.

But several industry players, including you, had expressed confidence that this 90-day asset classification norm will be quietly buried. What happened?

The Usha Thorat committee recommendations are three years old. We were earlier told that they will be put on hold. For three years nothing happened.

The Nachiket Mor committee recommendations were completely in conflict with the Usha Thorat committee recommendations. He said that you should not have “one-size-fits-all” for provisioning, it depends on the risk profile. For large entities it should be 60-days and for the person at the bottom of the pyramid, it should be even as long as 365-days.

Ultimately, these moves will have an impact on the deprived community, which we are servicing. It is basically a complete lack of understanding of how small businesses work.

Will you seek a repeal of some of the provisions in the regulations? If so, how?

The KV Kamath committee has been formed for redefining the small-business finance architecture. It is only about one month old. It is supposed to give the contours of what a small business finance company should be and what are the various facilitators that the regulators have to give for enhancing finance to that particular sector.

So, our expectation was that they will at least wait for that report to come. So, today that report has to undo a lot of things that has been done which is going to be really difficult. You don’t expect the RBI to go back on something they have promulgated. But yes, we will take it up through the appropriate forum.

Are you better off by converting yourself into a bank?

I have always said that if it is better to suffer as a bank than suffer as an NBFC, we will suffer as a bank. If we have a regulator that does not understand what is going on at the ground and if it wants to follow global practices and all that, irrespective of whether they are replicable or appropriate to this country’s emerging status, then, yes, we may end up choosing that route.

But I don’t think that is a solution. The solution for our kind of economy is that you will need NBFCs to do the last mile.

I think we need NBFCs for the next 10-15 years, till such time banks start lending to such sectors on their own. Else, you have to create 10-15 new banks, who will demonstrate to the other banks that such lending is profitable and they are worth doing.

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