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In the process of winding down their operations on the RBI’s orders, the two remaining residuary non-banking companies (RNBCs) in the country have paid out nearly Rs 20,000 crore to depositors since 2007-08.
The total quantum of public deposits with Sahara India Financial Corporation Ltd and Peerless General Finance and Investment Co — which are RNBCs, a class of NBFCs that is not in the investment, asset financing or lending space — has fallen from Rs 22,358 crore in 2007-08 to just Rs 3,501 crore at present, RBI data show.
Unviable model
While Sahara has been given until June 2015 to repay all investors and cease operations, no timeframe has been set for Kolkata-based Peerless to wind up its operations.
The RBI had fought a pitched legal battle with the RNBCs over what it termed their “inherently unviable business model”, expressing concern over the mushrooming growth of financial investment companies that were offering staggering rates of interest to depositors.
Between 1987 and the mid-1990s, the RBI was engaged in a running battle with Peerless after it issued orders barring the RNBC from accepting fresh deposits.
While the Supreme Court allowed Peerless to continue its business, it told the RBI to take steps to “prevent exploitation of ignorant subscribers”.
Similarly, in 2008, the banking regulator barred Sahara India Financial Corporation from accepting fresh deposits. It said RNBCs, such as Sahara, did not adhere to rules regarding payment of the minimum prescribed rate of interest, asset-liability management-liability guidelines and ‘know your customer’ norms for opening deposits.
They even failed to tell investors when their deposits matured.
This led to suspicion whether they were just speculative ventures floated to attract unwary investors and capture their hard-earned savings.
Meanwhile, after being out of fashion for several years, non-banking financial companies (NBFCs) have once again begun to attract large sums of money from the public.
Total public deposits with NBFCs rose 13.7 per cent to Rs 7,085 crore in 2012-13 from Rs 5,735 crore in the previous year.
Stringent checks
This was a marked improvement over the situation in 2008-09, when public deposits with NBFCs had shrunk to just Rs 1,971 crore on account of stringent checks put in place by the Reserve Bank to govern the functioning and practices of deposit-taking companies that did not fit the profile of a bank.
Among these, a ceiling on the interest rate that could be offered by these NBFCs and guidelines governing the acceptance of deposits has been the biggest damper on business.
The quantum of funds parked in these deposit-taking financial institutions is still a far cry from the peak of Rs 13,572 crore in 1997-98, the year in which NBFCs were first brought under the regulatory purview of the RBI.
Taking into account RNBCs, the cumulative deposits have fallen by more than half (55.5 per cent) since 1997-98 to Rs 10,586 crore in 2012-13.
The fall in deposits with these NBFCs was accompanied by a sharp drop in the number of NBFCs authorised by the RBI to carry out this business.
The RBI Handbook of Statistics for 2012-13 indicates that 254 NBFCs and two RNBCs are currently operational.
In 1997-98, there were 1,420 NBFCs and nine RNBCs; by 2005-06, this had fallen to 428 NBFCs and three RNBCs, which had cumulative public deposits of Rs 22,623 crore.
Pertinently, from the time NBFCs were brought under the RBI up to 2010-11, the bulk of public deposits with NBFCs have always been accounted for by RNBCs.
The peak of Rs 24,699 crore for NBFC deposits was seen in 2006-07. Of this, deposit-taking NBFCs accounted for just Rs 2,077 crore, whereas public money parked in the RNBCs amounted to Rs 22,622 crore.
But this situation reversed in 2011-12, with conventional deposit-taking NBFCs accruing a larger share of public deposits than the RNBCs for the first time in 13 years.
This can be primarily attributed to the RBI directive to the RNBCs not to accept any further deposits and wind up their businesses.
>arvind.jayaram@thehindu.co.in
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