RBI bans NBFCs from real estate speculation

RBI bans NBFCs from real estate speculation RBI bans NBFCs from real estate speculation

Source: IRIS NEWS DIGEST (23 February 2007)

After making it difficult for banks to lend to real estate, the Reserve Bank of India (RBI) has placed restrictions on finance companies investing in real estate, reports Economic Times.

RBI on Thursday released new norms for finance companies that restrict them from speculating in property. The policy will enable RBI to monitor the market exposure of finance companies on a monthly basis.

The central bank has recast its rule book for finance companies by coming out with two sets of regulations, one for finance companies with deposits and another for those not availing of public deposits.

The guidelines strive to distinguish asset finance companies from loan and investment companies among the deposit-taking NBFCs.

Under the new norms, finance companies which accept public deposits can not invest more than 10% of their net worth in land or property, except for its own use. At the same time, investment in unquoted shares of a company that is not a subsidiary has to be limited to 10% of net worth.

Loan and investment companies are, however, allowed to invest up to 20% of their net worth in unquoted shares.

Current guidelines require asset finance companies to ensure that 60% of their loans go to lease and hire-purchase of machinery, the remaining 40% is used by finance companies to fund the real estate sector. If a finance company acquires land or property or unquoted shares in exchange of its bad loans, these assets have to be disposed off by the NBFC within three years.

Finance companies and Residuary Non-Banking Finance Companies (RNBFCs) with total assets of Rs 100 crore and above, according to the previous audited balance sheet, will have to submit a monthly return on their exposure to capital market within seven days of the expiry of the month to RBI. Sahara and Peerless are the two largest RNBFCs with a combined deposit base of Rs 8,000 crore. The two companies will now have to report their investments on a monthly basis to RBI as against quarterly reporting earlier.

The new mandate bars finance companies that have defaulted on public deposits from extending any loan or making any investment or create any other asset as long as the default exists. From now on, the off-balance sheet exposure of a non-banking finance company will be reckoned as a direct exposure for the purpose of exposure limits.

In January, RBI had permitted NBFCs to diversify into new businesses. It said that NBFCs would selectively be allowed to issue co-branded credit cards with banks. At the same time, they were allowed to market and distribute mutual fund (MF) products as agents of mutual funds.

* Q - Quote , N - News , C - Chart , F - Financials


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