Some of the norms are a shade too stringent, says industry

The recommendations of RBI panel on NBFCs have drawn a mix of reactions from the NBFC industry. While broadly welcoming the alignment of regulations of NBFCs with banks on a number of issues, including accounting norms, provisions, asset classification and the like, industry captains said that some norms were a shade too stringent.

The proposed increase in Tier-1 capital to 12 per cent would affect a few companies in the industry because it is a steep increase, Mr R. Sridhar, Managing Director, Shriram Transport Finance Company, said.

His own company would manage as it sufficient capital cushion of 18 per cent on Tier-1 capital and 6 per cent on Tier-2 capital, he said.

Regarding the application of asset classification and provisioning norms of banks to NBFCs, he said that borrowers from NBFCs would find this a bit difficult.

Currently, NBFCs have a 180-day norm (default in interest or principal repayment) before an asset is recognised as an NPA (non-performing asset). Banks follow a 90-day norm.

Mr Sridhar said that they would ask the RBI to give the industry some leeway on this requirement.

“We'll have to bring more fiscal discipline among our clients. Since the migration is proposed over three years or 12 quarters, we are hopeful that we can educate our borrowers also and get them ready.”

Mr Sridhar also said that a number of small NBFCs will go out of the RBI registration net if the recommendations of the working group are accepted. He said that based on the 12 per cent capital adequacy requirement, an NBFC with assets of at least Rs 50 crore (proposed threshold) would have to have net worth of Rs 10 crore as against the current minimum net worth requirement of Rs 2 crore.

Mr T. T. Srinivasaraghavan, Managing Director, Sundaram Finance, said that the working group's recommendations, on first reading, seems very positive for the NBFC sector.

He said that the recognition of the role played by the NBFC sector in last mile credit delivery is heartening and is a significant endorsement, by the regulator, of the role played by the NBFCs in the much talked about financial inclusion.

He said, “The tax treatment in respect of income-tax deduction for provisions made under the regulations is something we have been asking for, for the last 15 years. Second, the benefit that is likely to accrue to NBFCs under the SARFAESI Act is also a positive step for the NBFCs.:

“We believe that the message that the regulator is looking to send out through this report is to have a greater convergence between the regulation of banks and non-banks. There seems to be a roadmap for this convergence and we believe that this will happen over a period of time,” he added

Unaddressed issue

He, however, expressed disappointment that a long-standing plea of the NBFCs for differential risk weights for different classes of assets financed by NBFCs had not been addressed in the report.

While the risk weights for NBFCs with capital market and commercial real estate exposures have been raised, the report has not touched upon the NBFC sector's plea for preferential risk weights for the lower risk assets financed by them.

“Asset financing NBFCs have consistently demonstrated their ability to manage retail portfolios with low levels of credit losses and it is only fair that this be duly recognised by the RBI.”

Mr V. Lakshmi Narasimhan, CFO, Magma Fincorp, termed the RBI's guidelines as quite balanced, provided they get implemented. He, however, said that a couple of recommendations transcend the RBI's purview.

For instance, the guidelines say that asset classification and provisioning norms similar to banks to be brought in phased manner for NBFCs. Suitable income-tax deduction akin to banks may be allowed for provisions made under the regulations.

As of now, tax benefit is available for NBFCs only for write-offs, while banks get tax benefit for provisions. But how can the RBI change the tax provisions, he asked?

He expressed similar scepticism about whether giving SARFAESI benefits falls within RBI's purview.

He further added, “The guideline says that the Tier I capital for CRAR (capital to risk weighted assets ratio) purposes may be specified at 12 per cent to be achieved in three years for all registered deposit taking and non-deposit taking NBFCs.

“But with banks sitting on 4.5 per cent Tier I, this does not remove the arbitrage between banks and NBFCs. This is a regressive step for NBFCs.”

The RBI has also has not looked at issues like priority sector lending and ECBs, which are very critical for NBFCs, he said.

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