Home >Industry >Banking >RBI expresses inability to regulate all NBFCs

New Delhi: The Reserve Bank of India (RBI) has expressed its inability to regulate all entities that operate as non-banking financial companies (NBFCs) but are not registered with the central bank, citing shortage of manpower.

The central bank’s comments were sent to the government as part of the deliberations between various ministries and financial sector regulators to effectively clamp down on such schemes, following the collapse of West Bengal-based Saradha Group, said two government officials. Mint reported on Monday that the central bank has written to several such companies seeking balance sheet and other details as part of the effort to rein in such activities.

The government had set up an inter-ministerial group (IMG) to look into ways of plugging regulatory loopholes related to such multi-level marketing schemes. The central bank’s comments will be taken up by the inter-ministerial group at its next meeting.

“The central bank has sent its comments. They have pointed out that they regulate only those entities that are registered with it. Only those entities where financial assets are more than 50% of their total assets and derive at least 50% of its gross income from such assets are registered with the central bank as an NBFC," said one of the officials. “They have also said that given the manpower available with them, it is difficult for them to regulate all such entities. The IMG will discuss their comments, but if the central bank does not regulate such entities, then who will?" the official said.

The RBI spokesperson declined to comment for the story.

The government is looking for ways to strengthen the regulators to curb practices that lead to the duping of investors, said the official. The 18 July ordinance to give more powers to capital market regulator Securities and Exchange Board of India (Sebi) was one such step, the official added.

The ordinance gives the regulator more powers to check illegal collective investment schemes. Sebi can now regulate any pooling of funds under an investment contract involving a corpus of 100 crore or more. It can also attach assets in the case of non-compliance and seek telephone call data records during the course of its investigation. The chairman of Sebi will have powers to authorize search-and-seizure operations to crack down on pyramid schemes.

Sebi is fighting a legal battle with companies such as MPS Greenery Developers Ltd and Rose Valley Real Estates and Constructions Ltd in West Bengal to stop them from collecting public deposits under collective investment schemes, but has not been very successful.

“Only when the company abandons the depositor does the matter come in front of the regulators. But by then generally it’s too late to protect the depositors," said J.N. Gupta, founder and managing director of Stakeholder Empowerment Services, an advisory.

“Banks will have to play an important role for early detection as they can monitor the flourishing of any Ponzi scheme at the grassroots level. It is very difficult for RBI to monitor these schemes on a first-hand basis. But the problem is connivance of bankers with such clients," he said.

The Saradha Group, one of the largest deposit-taking companies in eastern India, collapsed in April and its chairman and managing director Sudipta Sen was arrested after it started defaulting on repayments following pressure on finances.

The operation seemed to slip through regulatory loopholes as it didn’t classify as an NBFC, a chit fund, or any other regulated entity, and hence was not regulated by RBI, Sebi, state governments or the Chit Fund Act.

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