BackNBFCs brace for tougher norms from RBI
NBFCs are worried RBI's new norms will lead to increased provision requirements which could hurt profitability
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Mumbai: Ahead of the new framework for non-banking finance companies (NBFCs) expected by the end of this month, the central bank has been slowly tweaking norms for them, signalling tighter regulation on cards.
Analysts said the Reserve Bank of India (RBI) has quietly put in place small changes during the current fiscal year, creating a more level playing field between NBFCs and banks—which often do the same kind of business but are subjected to different regulations.
On 21 August, RBI limited the amount NBFCs can lend against shares pledged as collateral to only 50% of the value of the shares.
Also, these lenders will be allowed to accept only so-called Group 1 shares (or frequently traded shares) as collateral while giving loans of ₹ 5 lakh and above.
Mangesh Kulkarni, who tracks NBFCs at Almondz Global Securities Ltd said the measures are aimed at bringing in parity between banks and NBFCs.
“RBI wants to ensure that NBFCs do not go overboard in lending against shares, for example, which could create problems for the financial system," Kulkarni said.
Banks and NBFCs are subject to different regulations when it comes to loans to volatile sectors such as capital markets and real estate. While banks are allowed to lend against shares, the purpose of the loan and the amount are strictly regulated.
Banks are also required to maintain a margin equivalent to 25% for shares held in dematerialized form. NBFCs, on the other hand, till recently were not subject to such specific instructions.
Earlier in May, RBI directed all NBFCs to take its permission before any transaction requiring transfer of more than 10% of their shares.
This brings them closer to banks, where an acquisition of more than 5% shares in a bank requires approval from the regulator.
However, some of the more significant regulatory changes suggested by the Thorat committee such as higher capital requirements, tighter norms for bad loans and provisioning similar to those applicable for banks, are still to be implemented.
In its monetary policy review on 30 September, RBI said it will introduce changes in the regulatory framework for NBFCs by October end, relating to “core capital, asset classification and provisioning norms, regulation on deposit acceptance, corporate governance and consumer protection measures".
One big change expected by analysts is a change in the norms for recognition of NPAs (non-performing assets) by NBFCs, bringing them on par with banks. Currently, banks classify loans unpaid for 90 days as NPAs; NBFCs classify loans unpaid for 180 days as NPAs.
Kulkarni said cutting the duration will ensure reduction in regulatory arbitrage because “some loans were declared bad by banks but continue to remain standard assets for NBFCs."
Santosh Singh, analyst at Espirito Santo Securities said RBI has already taken small steps to reduce regulatory arbitrage between banks and NBFCs, but more tightening could be expected.
“They could, for example, increase the CAR (capital adequacy ratio) for NBFCs to 15% from the 12% currently, but the changes will not be such that could impact the long-term profitability of the sector," Singh said.
Even so, NBFCs remain worried that RBI’s new norms will lead to increased provision requirements which could hurt profitability.
“Provisions should depend on the risk profile of customers. Hindustan Unilever cannot have the same risk profile as a transport finance company. NBFCs serve a different set of customers from banks. These customers have irregular cash flows and require tolerance in servicing loans. If provisions changes are uniform it could hit whatever little financial inclusion is happening through NBFCs," said G.S. Sundarajan, group director of Shriram Group which finances commercial vehicles, consumers and small businesses, among others.
Bigant Haria, assistant vice president, research at Antique Stock Broking Ltd, said though large scale changes are unlikely, different sets of NBFCs could have different norms.
“There are some businesses that are unique to NBFCs like financing used vehicles which may require different norms, but some changes have already been made like capital adequacy for gold loan NBFCs (12%) is different from micro finance companies (15%)," Haria said.
According to former RBI deputy governor Thorat, the idea behind reviewing NBFC regulations is to prevent any financial stability risk rather than to eliminate the arbitrage between banks and NBFCs.
“It (the idea) is to ensure that NBFCs which borrow from banks and wholesale markets and undertake lending, do not threaten financial stability. The arbitrage between NBFCs and banks can never be completely eliminated because banks have to maintain stringent norms like SLR, CRR and priority sector lending, which NBFCs don’t have to. But banks have access to payment systems and public deposits which NBFCs don’t have," Thorat said.
Banks have to compulsorily invest 22% of deposits in government bonds which is known as statutory liquidity ratio (SLR). They also keep 4% of their deposits for no interest with RBI as cash reserve ratio (CRR).
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