In order to adopt a consultative approach, the Reserve Bank of India (RBI) has placed draft guidelines to address issues and concerns in the NBFC sector.
The draft guidelines are based on recommendations made by the Working Group on the issues and concerns chaired by Usha Thorat, former deputy governor, Reserve Bank of India. The report of the working group was placed on RBI website in August 2011.
It may be recalled that the working group was constituted to review the existing regulatory and supervisory framework of non-banking finance companies (NBFCs). The objectives of the working group were to address issues relating to regulatory arbitrage and systemic risk, so as to create a strong and resilient non-banking financial sector.
The draft revised guidelines relate to entry point norms, principal business criteria, prudential regulations, liquidity requirements for NBFCs and corporate governance. While accepting some of the suggestions, the bank has been mindful that their implementation should not disrupt the sector. Hence, ample transition time has been proposed to bring the new regulatory framework into existence.
Non Banking Financial Companies (NBFC) would need RBI's prior approval before making changes in their ownership control. The RBI's draft guidelines based on Usha Thorat Committee report also seek to make mandatory for all deposit-taking NBFCs to obtain credit rating. Appointment of CEOs of NBFCs with asset size of Rs 10 billion and above would require the RBI approval, it added.
``In the interest of good governance and the sensitivities associated with NBFCs...such companies, whether listed or not, will need to comply with Clause 49 of SEBI's listing agreement on corporate governance including induction of Independent Directors,`` the draft said. The draft norms said existing unrated NBFCs-D will be given a period of one year to get rated, ``thereafter, they would not be allowed to accept any fresh deposits or renew existing deposits, till they get themselves rated,`` it said.
On change in control or transfer of shareholding, the draft said that all registered NBFCs should take prior approval from the RBI where there is a change in control and increase of shareholding to the extent of 25% by individuals or groups, directly or indirectly. Regarding non-performing assets (NPAs), the RBI has proposed that asset classification and provisioning norms should be made similar to that of banks for all registered NBFCs irrespective of size.
At present, the period for classifying loans into NPAs in case of NBFCs is higher at 180/360 days compared to 90 days for banks. The draft guidelines are based on recommendations made by the Working Group headed by former RBI Deputy Governor Usha Thorat. The panel was constituted to review the existing regulatory and supervisory framework of NBFCs. The objectives of the group were to address issues relating to regulatory arbitrage and systemic risk, so as to create a strong and resilient non-banking financial sector.
The draft further said it has been decided that Tier I capital be raised to 12% for all captive NBFCs and for NBFCs that are into lending or investment in sensitive sectors like capital market, commodities and real estate. To address liquidity risk, it said all NBFCs should maintain high quality liquid assets. It has also proposed that henceforth NBFCs be classified under two categories -- exempted NBFCs and registered NBFCs. All registered NBFCs would be under RBI regulation, while the RBI reserves the right to bring the other category under its regulation "should the need arise". The RBI has sought stakeholder comments on the draft norms by Jan. 10, 2013.