The Reserve Bank of India (RBI) last week announced new stipulations for non-banking finance companies (NBFCs) in what is seen as an attempt to drive convergence among various players in the financial services sphere.

As part of this exercise, the RBI said that the NBFCs should raise their net-owned funds to Rs.2 crore by 2016, and reduce the NPA (non-performing assets) recognition time to 90 days by 2018. Also, the NBFCs are told to increase the provisioning for standard assets to 0.4 per cent by March, 2018. After March, 2016, rating becomes mandatory for all asset financing firms that take public deposits. Further, the apex bank stipulated that all systematically important NBFCs have a Tier-I capital of 10 per cent by 2017.

These and other fresh terms have put the spotlight back on NBFCs. A vital clog in the financial services space, NBFCs have always been looked upon with circumspection. The havoc caused by avaricious NBFCs of unincorporated variety in the 1990s is still fresh in memory. Since then, it has been quite a struggle for NBFCs due to assorted reasons ranging from stricter regulation to global financial melt-down and what not. Predictably, the latest RBI terms have left the industry fretting and fuming. A sense of frustration has left a feeling of resignation among them. That the RBI has put all eggs — good, bad and ugly — in one basket, and treated the diverse constituents of NBFCs as a homogenous group has upset the long-serving saner players in the industry.

There are no two views on the need to exercise stricter supervision over the NBFCs. There also appears to be no disagreement on pushing them on a par with banks insofar as it allows them to conform to best accounting practices. The moot point, however, is: Are they really given a level playing field in the financial services space. The rules as they exist and re-laid lately don’t seem to facilitate a game of equals. That has been the grouse, more than stricter regulations per se. If the absence of level playing field is a common concern, the application of rules to all NBFCs of unlike-kind commonly has proved a big worry for many in the industry.

Is it difficult to prescribe a risk-related capital requirement for NBFCs based on the assets they finance? The inability, rather unwillingness, of the RBI to do this has resulted in an unequal play filed within the NBFC space. This, in a way, has an unintended consequence of driving up the cost for NBFCs which have less risky assets in their portfolio.

If the objective is to straighten the field in the financial service sector, the NBFCs, too, should have banks-like empowerment to re-possess assets should they turn NPAs by any chance. “If we have to protect the public funds which we have deployed, we need tools as well to protect the public funds,” argues a top functionary of a non-banking finance firm.

The enforcement of contractual right in the event of a default has become tougher these days due to assorted reasons. Precisely for this reason, a demand is gaining increasing currency to extend the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act to the NBFCs.

From time immemorial, NBFCs have been playing the role of last-mile connectors in the socio-economic chain. So, it is important that this industry does not run dry for money. Their ability to take public deposits is constrained even further by the latest RBI guideline. On the other hand, the ECB (external commercial borrowing) window also shut on them. Ipso facto, they have to depend heavily on bank funding and domestic debt. These aren’t least cost option though. Level-field suggests that NBFCs should also have multiple fund-raising options. With political bosses going to town with their social inclusion slogan, constraining the NBFCs could very well negate this political goal, which has been embraced by almost all parties in different ways.

What has hurt the NBFCs most is the step-motherly treatment given by the tax authorities. While banks and housing finance companies are given exemption in respect of income relating to NPAs, this privilege is denied to the NBFCs. They are in an unenviable spot. The RBI does not allow NBFCs to recognise income if the asset turns NPA.

The taxmen, however, demand NBFCs to pay tax on income that is not allowed to be recognised in the books of accounts by the RBI. Indeed, the NBFCs find themselves in a ‘loss-loss’ situation.

What is required in the changed time and context is a relook at NBFCs from a realistic perspective taking into consideration the evolution that has happened over the last two decades.

>jagannathan.kt@thehindu.co.in

(Courtsey: The Hindu)

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