The RBI working group on NBFC issues and concerns has tried to address both regulatory concerns as well as the industry's concerns, its chairperson, Ms Usha Thorat told Business Line on Monday. Ms Usha Thorat is currently Director, Centre for Advanced Financial Research and Learning (CAFRAL), and a former deputy governor of the Reserve Bank of India.

She allayed misgivings expressed by a section of the NBFC industry which wondered whether the proposed 'regulations' would do them in. She said, this was clearly not the intention. She said NBFCs had played an important role in the economy, especially in improving last mile connectivity.

Asked if the higher norms on capital adequacy (Tier-1 capital to be 12 per cent in 3 years) were not too stringent, she said the aim was to reduce leverage that a NBFC enjoyed today with public funds. Currently an NBFC can borrow upto 12 times its own funds. This would come down to about 8 times when the proposals come into force. Asked if NBFCs would not find it difficult to meet this requirement if their profit generating capacity was also hampered, she said that their Return on Equity (RoE) and Return on Assets (RoA) were quite high and this was attracting a lot of capital into those sectors. While conceding that there may be a temporary difficulty for NBFCs in terms of costs of funds, she pointed out that the regulations proposed were over a 3-year time frame and expressed confidence that they would be able to find resources.

Ms Thorat said that the attempt of her panel was to minimise scope for regulatory arbitrage and plug the gaps that were currently there. She pointed out for instance, that in the case of lending for margin financing, stock brokers had to abide by SEBI guidelines, while banks had to abide by RBI guidelines. But for NBFCs there were no regulations.

She said further, "We have addressed certain important issues such as 'concentration risk' and 'funding risk'. There are many NBFCs which are basically single product companies - whether it is truck financing or gold loans or equipment financing - and these face concentration risks. And there are NBFCs which are into capital markets business or real estate business which lend long-term on the basis of short-term borrowings. We have addressed the concentration risk issue by prescribing higher capital adequacy norms and funding risks by bringing in Asset liability management (ALM) guidelines."

Elaborating, she said that the working group had recommended a liquidity ratio for NBFCs to act as a buffer in the event of any kind of stress upto a period of 30-days - in the first instance. So, all NBFCs, both deposit taking and non deposit taking should hold Government securities equal to the gap between their total inflows and outflows up to the 30 day period. Beyond that period, there would be time to arrange appropriate resources or liquidate necessary assets in the event of a crunch, she said.

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