A holiday in Turkey is the wrong time to interrupt anyone on official matters. Still, when the Reserve Bank of India released the report of its working group on the NBFC sector this morning, one had no choice but call Ms Usha Thorat, Chairperson of the group for her insights.  

Ms Thorat, a former Deputy Governor of the RBI, is currently Director, Centre for Advanced Financial Research and Learning (CAFRAL).

 Ms Thorat was just about to take a cruise down the picturesque Bosphorus strait in Istanbul that divides Asia and Europe, but graciously gave a few minutes to explain the approach of her panel and what they tried to achieve in their report. 

Despite the noise (one could hear some announcements on a loudspeaker in the background), she readily answered a number of questions and was able to recall the highlights and intricate details of the report from memory. 

Asked about this, she said with a laugh, “We have been steeped in this for the last eight months.”

Addressing the concerns

She was at pains to emphasise that her panel has tried to address both regulatory as well as the industry's concerns. 

Ms Thorat 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 three years) were not too stringent, she said the aim was to reduce leverage that an NBFC enjoyed today with public funds. 

Currently, an NBFC can borrow up to 12 times its own funds.  This would come down to about eight 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, the former Deputy Governor of the RBI pointed out that the regulations proposed were over a three-year timeframe and expressed confidence that they would be able to find the 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 that in the case of lending for margin financing, stock brokers have to abide by SEBI guidelines, while banks have to abide by RBI guidelines. But for NBFCs there are no regulations.

Key risks

Further, she said, “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.”

Liquidity ratio

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 up to a period of 30 days — in the first instance. 

So, all NBFCs, both deposit taking and non-deposit taking, should hold cash or 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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