NBFCs expected more from Mor panel

The recommendations of the Nachiket Mor Committee, released by the RBI on January 7, fall short of expectations of leading non-banking finance companies.

NBFCs are a motley lot, though. Included under the same rubric are large, bulk lenders such as Power Finance Corporation, subsidiaries of foreign banks, companies such as Sundaram Finance and Shriram Transport Finance that finance purchase of assets used for business (like trucks), those who lend money against pledged gold, and a large number of cubby-hole localised, informal lending companies that give you money, if they know you.

The refrain of NBFCs is that the regulations are too broad-based, not distinguishing their varied characteristics.

Ever since the failure of CRB Capital Markets in 2000, NBFCs seem to think the RBI sees them as companies that raise funds from the public and vanish. The irony is that the amount of public deposits with them is a mere Rs 7,000 crore compared with some Rs 40-lakh crore held by banks as deposits.

However, the committee’s report, titled ‘Comprehensive Financial Services for Small Business and Low-Income Households’, observes that NBFCs have “a great deal of continuing value to add”. This held out the hope that some path-breaking recommendations would ensue.

Many NBFCs that Business Line spoke to said that while the recommendations had some positive features — such as allowing them to raise funds from abroad as external commercial borrowings and permitting them to seize the assets of defaulters under the Sarfaesi Act, just as banks do — some of their biggest and long-standing demands have not been addressed.

They, for instance, have been seeking permission to raise more money from the market for the same amount of ‘own capital’. Banks need Rs 9 of their own for every Rs 100 they lend; NBFCs need Rs 15.

That is, if a bank has Rs 9 of its own money, it can borrow Rs 91 from the market to be able to lend Rs 100. An NBFC, on the other hand, can borrow only Rs 85. The Mor Committee wants to retain status quo.

The committee has also rejected the call to bring ‘risk weights’ of the loans given by NBFCs on a par with those by banks. A lower ‘risk weight’ means lesser amount of own funds relative to the quantum of the loan.

Had these two demands been met, NBFCs would have had more funds to lend. NBFCs are surprised that given the mandate of the committee, which is to step up access to formal credit to all, these demands were not met.

Today, most Indians have no means of getting a loan from an institution, which is far cheaper than their only source currently, the local moneylender.

The committee itself notes: “Close to 90 per cent of small businesses have no links with formal financial institutions and 60 per cent of the rural and urban population do not even have a functional bank account.”

NBFCs, being the closest to the poor borrowers, claim they are best suited for achieving more ‘financial inclusion’. “Those who know financial inclusion the best are being excluded,” laments T. T. Srinivasa Raghavan, Managing Director, Sundaram Finance Ltd.

Also, the Mor Committee wants to tighten the screws on NBFCs when it comes to bad loans. For banks, if a borrower has not paid interest for 90 days, the money lent to him becomes a non-performing asset and has to be provided for, which means lower profits.

NBFCs could, however, wait until 180 days before having to declare the loan as an NPA. The committee now wants to bring NBFCs on a par with banks, though it says both types of institutions should follow ‘risk-based approaches’, rather than a generic — that is, ‘number of days’.

Banks, however, can claim tax benefits for the ‘provision for NPA’, while NBFCs cannot. The committee is silent on this, presumably because tax issues come under the Finance Ministry.

ramesh.m@thehindu.co.in