Abstract
Non-bank financing companies form an integral part of the Indian financial system. In addition to banks, NBFCs also provide funding for various important economic activities, thereby contributing to the growth of the Indian economy. By this process, the NBFCs provide a healthy competition to the banks in terms of various service parameters.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Currently, only change in control of deposit accepting NBFCs requires prior approval of the RBI.
- 2.
For more details, see RBI website: www.rbi.org.in/scripts/NotificationUser.aspx?Id=9327.
- 3.
The Study Group set up to examine the role and operations of NBFCs recommended that: (i) there should be two classifications of NBFCs, namely ‘approved’ (i.e., those which satisfy certain additional requirements such as adequate amount of capital, reserves, liquid assets, etc.) and ‘non-approved’; and (ii) the regulation need to be centred primarily on the ‘approved’.
- 4.
The Study Group’s suggested regulatory framework aimed at keeping the magnitude of deposits accepted by NBFCs within reasonable limits and ensuring that they were in conformity with the objectives of monetary and credit policy.
- 5.
The committee’s recommendation for introduction of a system of licensing for NBFCs is basically aimed to protect the interests of depositors.
- 6.
The working group recommended against allowing NBFCs into call money market.
- 7.
The committee underscored the growing importance of NBFCs in the financial intermediation process and their recourse to borrowing. It outlined a framework for streamlining their functioning which included, in addition to the existing requirements of gearing and liquidity ratios, norms relating to capital adequacy, debt-equity ratio, credit concentration ratio, adherence to sound accounting practices, uniform disclosure requirements and asset valuation. The committee also argued that the supervision of these institutions should be done by an agency to be set up for this purpose under the aegis of RBI. For these purposes, a suitable legislation need to be introduced for ensuring sound and healthy functioning of NBFCs and also for safeguarding depositors’ interests.
- 8.
The committee recommended for strengthening the legislative framework and vesting RBI with more powers to effectively regulate NBFCs.
- 9.
The wide-ranging recommendations by the working group are considered as a watershed development in the NBFC sector which laid down a strong plinth for constructing the future regulatory structure of the sector. Subsequently, many new legislations were brought in.
- 10.
The committee recommended for off-site surveillance and on-site examination system for NBFCs based on their asset size and the nature of business. It also recommended for bringing in more transparency in their financial statements.
- 11.
The committee recommended that (a) mergers between banks and between banks and DFIs and NBFCs need to be based on synergies and locational and business specific complementarities of the concerned institutions; (b) the required statutory minimum net worth of NBFCs for registration need to be progressively enhanced to ₹. 2 crore which is permissible now under the statute and that in the first instance; it may be raised to ₹ 50 lakh; (c) no deposit insurance cover for deposits with NBFCs to be provided; and (d) an integrated system of regulation and supervision be put in place to regulate and supervise the activities of banks, financial institutions and NBFCs.
- 12.
The group proposed a new measure of liquidity aggregate incorporating NBFCs with public deposits of ₹. 0.20 billion and above.
- 13.
The Task Force recommended for (i) changing the existing legislative and regulatory framework for NBFCs to address the rising number of defaulting NBFCs and need for a quick redressal system; (ii) extension period for attaining minimum NOF beyond 3 years (January 2000) needs to be made conditional on adequate steps taken by the concerned NBFCs, and the minimum prescribed NOF of ₹. 25 lakh needs to be revised upward; (iii) RBI needs to draw up a time-bound programme for disposal of applications for registering NBFCs and provides the registration details to concerned states; (iv) higher CRAR of 15% for NBFCs seeking public deposits without credit rating as against existing 12% for rated NBFCs prescribed by the RBI; (v) RBI need to prescribe the ceilings for exposures to real estate sector and investment in capital market, especially unquoted shares; (vi) RBI may stipulate that 25% of reserves of NBFCs may be invested in marketable securities in addition to SLR securities already held by them; (vii) ceilings may be prescribed for public deposits with respect of different categories of NBFCs as follows: (a) NBFC with NOF less than ₹25 lakh—no access to public deposits, (b) EL/HP Company without credit rating—1.5 times NOF or ₹. 10 crore whichever is lower, subject to 15% CRAR, (c) EL/HP Company with investment grade credit rating—4 times NOF and (d) Loan/Investment Cos with investment grade credit rating—1.5 times NOF (higher CRAR of 15%); (viii) a suitable ratio between secured and unsecured deposits for NBFCs need to be preceded by measures to ease the flow of bank credit to them; (ix) Increased liquid asset ratio from existing 12.5 to 25% of public deposit in a phased manner and the statutory provision needs to be given to unsecured depositors first charge on liquid assets; (x) RBI needs to appoint the depositors’ grievance redressal authority with specified territorial jurisdiction with the help of the office of the Banking Ombudsman available in several states; (xi) It is necessary to set up a separate instrumentality for regulation and supervision of NBFCs under the aegis of RBI and entrusted under one executive director/supervised by a deputy governor; (xii) strengthening the off-site surveillance mechanism to identify/control NPAs; developing a sensitive market intelligence system to trigger on-site inspection, to be followed by appropriate regulatory response; (xiii) deposits accepted by unregistered NBFCs need to be considered as a cognizable offence; state governments should set up special investigation wings for enforcing this provisions; and (xiv) unauthorized deposit taking by unincorporated financial intermediaries needs also to be considered as a cognizable offence. State governments should quickly enact legislation on the lines of the Tamil Nadu legislation.
- 14.
The paper noted that (i) all NBFCs (other than RNBCs) with assets of ₹. 500 crore or above should be treated as a separate category of NBFCs; (ii) DFIs, which are established as companies should be regulated and supervised as a subset of NBFCs and on a footing different from what is applicable to large-sized NBFCs; and (iii) RBI should take initiatives to collect all relevant information to the systemic concerns pertaining to large-sized non-PD companies at regular intervals. This initiative may be followed up with more rigorous measures to prevent any threat to the systemic stability.
- 15.
The working group recommended various measures to ensure both the resilience of the NBFC sector and contain risks emanating from the sector in the context of overall financial stability. Broadly, they are on the following issues: (i) entry-point norms, principal business criteria, multiple and captive NBFCs; (ii) corporate governance including disclosures; (iii) liquidity management; and (iv) prudential regulation including capital adequacy, asset provisioning, risk weights for certain sensitive exposures and restrictions on deposit acceptance. A draft guidelines were prepared and kept in public domain for comments in December 2012 based on the recommendations of the working group and the subsequent extensive deliberations with all the stakeholders.
Author information
Authors and Affiliations
Corresponding author
Appendix
Appendix
Regulating NBFCs can be traced back to the late 1950s and early 1960s when the country witnessed several bank failures resulting in loss to depositor. At that point of time, although NBFCs were not as important as banks, RBI realized the potential threat from those NBFCs, which were collecting public deposits, to cause depositor run. Therefore, RBI initiated regulating them. The objectives of regulating NBFCs were to (a) shield depositor from any loss in case an NBFC fails, (b) ensure effectiveness of credit or monetary policy and (c) promote the NBFC sector on safe and sound lines.
Thus, the Banking Laws (Miscellaneous Provisions) Act, 1963, was introduced to incorporate a new chapter (i.e., Chapter III B) in the Reserve Bank of India Act, 1934, to regulate these companies. However, with a view to enunciating appropriate laws, the regulator appointed from time to time various committees to study the role, functions and operations of NBFCs in detail and recommend suitable policy measures for their growth on desirable lines. The committees which directly or indirectly contributed to building the NBFC regulatory architecture over time are listed below:
-
i.
Bhabatosh Datta Study Group (1971).Footnote 3
-
ii.
James Raj Study Group (1974).Footnote 4
-
iii.
Sukhamoy Chakravarty Committee on Working of the Indian Monetary System (1985).Footnote 5
-
iv.
N. Vaghul Working Group on the Money Market (1987).Footnote 6
-
v.
M. Narasimham High-level Committee on the Financial System (1991).Footnote 7
-
vi.
Joint Parliamentary Committee to investigate irregularities in the Securities Transactions (1992).Footnote 8
-
vii.
Shah Working Group on Financial Companies (1992).Footnote 9
-
viii.
Khanna Committee (1995) for designing a supervisory framework for NBFCs (Khanna Committee).Footnote 10
-
ix.
M. Narasimham Committee on Banking Sector Reforms (1998).Footnote 11
-
x.
Y.V. Reddy Working Group on Money Supply: Analytics and Methodology of Compilation (1998).Footnote 12
-
xi.
C. M. Vasudev Task Force on NBFCs (1998).Footnote 13
-
xii.
RBI Discussion Paper on Harmonization of the Role and Operations of DFIs and Banks (2004).Footnote 14
-
xiii.
Usha Thorat Working Group on the Issues and Concerns in the NBFC Sector (2011) (Table 3.2).Footnote 15
Table 3.2 Chronological account of regulatory developments in the NBFC sector
Rights and permissions
Copyright information
© 2019 Springer Nature Singapore Pte Ltd.
About this chapter
Cite this chapter
Kannan, R., Shanmugam, K., Bhaduri, S. (2019). Regulatory Developments and Prudential Norms. In: Non-Banking Financial Companies Role in India's Development. India Studies in Business and Economics. Springer, Singapore. https://doi.org/10.1007/978-981-13-3375-0_3
Download citation
DOI: https://doi.org/10.1007/978-981-13-3375-0_3
Published:
Publisher Name: Springer, Singapore
Print ISBN: 978-981-13-3374-3
Online ISBN: 978-981-13-3375-0
eBook Packages: Economics and FinanceEconomics and Finance (R0)