Money & Banking

Give ‘deposit-accepting licences’ to all non-bank lenders above a threshold: EY-FICCI report

K.R. Srivats | | Updated on: Oct 30, 2020
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India should grant ‘deposit-accepting licences’ to all non-bank lenders that are credit rated ‘A’ and above by at least two credit rating agencies and having capital/networth of over ₹1,000 crore, a joint report by EY-FICCI has recommended.

This recommendation forms part of the slew of measures suggested to provide a level-playing field for non-bank lenders (NBFCs and HFCs).

The EY-FICCI report, ‘Non Banking Finance Sector in India – Building Resiliency’, calls for a level-playing field for all non-bank lenders while ensuring that the interest of depositors, especially small depositors, are not compromised.

It may be recalled that the RBI has discontinued granting deposit-accepting licences to NBFCs in 1997, and still there are about 82 deposit-accepting NBFCs as on September 2019.

The report highlighted that there appears to be no objective criteria comprising asset quality, credit rating and capitalisation that determines the continuation of the deposit acceptance licence, nor there is any sunset provision to such deposit licences. Hence, certain old non-bank lenders, including those part of the industrial houses, continue to have access to public deposits just by virtue of their date of registration. “This creates an unequal playing field in the market,” the report said.

The National Housing Bank (NHB) had recently issued a draft discussion paper, through which it is proposing to reduce the maximum leverage to 12 and minimum capital adequacy to 15 per cent in a phased manner. This revised limit applies equally to deposit accepting as well as non-deposit accepting housing finance companies (HFCs).

The EY-FICCI report has called for several relaxations for raising funds through External Commercial Borrowings (ECBs). Although the ECB relaxations in July 2019 was in the right direction, certain modifications are needed, considering the existing scenario where, on account of Covid-19, fund raising has become difficult for the July 2019 relaxations to be effective.

In order to make the ECB window a real source of funding, ECBs having a maturity of 3/5 years and should also be allowed for on-lending or refinance, the report has recommended.

Alternatively, a sub-limit of, say 25 per cent, within the overall ECB raised, should be allowed for refinancing existing rupee debt for non-bank lenders.

The report has highlighted that there is a very limited non-existent market for non-bank lenders (for that matter any Indian borrower) to raise 7/10 year ECBs for on lending or refinance.

In July 2019, the RBI had, among other measures, allowed NBFCs to raise ECBs of minimum 7-year maturity for repayment of rupee loans availed domestically for capital expenditure.

Also, NBFCs were allowed to raise ECBs of a minimum 10-year maturity for working capital, general corporate purposes.

Meanwhile, the report has also made a case for Housing Finance Companies (HFCs) to raise ECBs for all types of home loans and not just for financing purchase of affordable housing units.

The exemption from withholding tax for ECBs should be extended on a long-term basis, the report has said.

Published on October 30, 2020

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