An RBI working group has recommended higher capital norms for non-banking financial companies (NBFCs), increased risk weights for NBFC lending to commercial real estate and capital markets sectors. The group has also recommended that accounting norms and provisions that are currently applicable to banks be applied to NBFCs also in a phased manner.

The Reserve Bank of India working group on NBFC sector issues and concerns, headed by Ms Usha Thorat, former Deputy Governor, RBI and current Director, Centre for Advanced Financial Research and Learning (CAFRAL), released its report this morning.

The group was set up for reviewing all regulations relating to the NBFC sector in the light of concerns about NBFCs exploiting gaps in regulation to carry on their business which was similar to banking business.

The fast growth in the NBFC sector, leveraging on public funds (deposits) has been a source of regulatory concern. The main theme of this report seems to be to bring NBFC regulations more in alignment with the rules that govern banks.

The group has, therefore, recommended that a number of regulations that currently apply to banks be applied to NBFCs also.

The key recommendations of the group are:

1. The RBI retains the minimum net owned fund (NOF) requirement for all new NBFCs wanting to register with the Reserve Bank at the present Rs 2 crore till the Reserve Bank of India Act is amended. The RBI should, however, insist on a minimum asset size of more than Rs 50 crore for registering any new NBFC. Existing NBFCs below this limit may deregister or be asked to seek a fresh certificate of registration at the end of two years.

2. NBFCs not accessing public funds may be exempted from registration provided their assets are below Rs 1,000 crore

3. Any transfer of shareholding, direct or indirect, of 25 per cent and above, change in control, merger or acquisition of any registered NBFC should have prior approval of the RBI.

4. The twin-criterion of assets and income for determining the principal business of an NBFC should be increased to 75 per cent of the total asset and 75 per cent of the total income, respectively. A time period of three years may be given to fulfil revised principal business criteria.

5. Tier I capital for Capital to Risk Weighted Assets Ratio (CRAR) purposes may be specified at 12 per cent to be achieved in three years for all registered deposit taking and non-deposit taking NBFCs.

6. Liquidity ratio may be introduced for all registered NBFCs such that cash, bank balances and holdings of government securities fully cover the gaps, if any, between cumulative outflows and cumulative inflows for the first 30 days.

7. 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. Accounting norms applicable to banks may be applied to NBFCs.

8. NBFCs may be subject to regulations similar to banks while lending to stock brokers and merchant banks and similar to stock brokers, as specified by the Securities and Exchange Board of India (SEBI), while undertaking margin financing.

9. Financial conglomerate approach may be adopted for supervision of larger NBFCs that have stock brokers and merchant bankers in the group.

10. Government owned entities that qualify as NBFCs may comply with the regulatory framework applicable to NBFCs at the earliest.

11. NBFCs may be given the benefit under SARFAESI Act, 2002.

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