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BW Businessworld

Reining In NBFCs

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Nobody can say with  any accuracy exactly how many non-banking financial companies (NBFCs) operate in India. At the end of March 2012, there were 12,385 NBFCs that had a certificate of registration (CoR) from the Reserve Bank of India. However, not all NBFCs are registered with the central bank.
 
NBFC itself is a bit of a catch-all term. It encompasses a wide variety of market players. At one end are chit fund companies. Then there are NBFCs that focus on a single line of business — say vehicle finance, or gold loans, or something else. And then there are huge financial companies with multiple lines of business — everything from vehicle leasing to broking to wealth management.

There are NBFCs that have revenues bigger than many small banks. And then there are small, mom-and-pop shops which have a balance sheet size of less than Rs 1 crore.
 
For some time now, the RBI has been trying to figure out how to regulate and monitor NBFCs better. The issue is that while the top 10 or 20 NBFCs are pretty well regulated, hundreds of the smaller NBFCs raise money and lend out money with hardly any regulatory oversight. The RBI simply does not have the resources to keep a close watch on them.
 
In September 2010, the RBI constituted a committee headed by deputy governor Usha Thorat (she was just about to retire) to look at how to better regulate NBFCs. The Thorat committee submitted its report, and the RBI has now sent its draft guidelines based on it to the finance ministry. If all the recommendations in the RBI draft are accepted, the NBFC universe will see a shakeout and lots of exits. In fact, over 70 per cent of NBFCs may have to deregister from the RBI.
 
The Thorat committee recommendations and the RBI draft have drawn howls of protest from NBFCs, especially the smaller ones. Even some of the biggest NBFCs are unhappy because they think that the proposed guidelines force them to take on all the burdens of a commercial bank, but without the licence or privileges of a real bank. There are other issues as well.
 
Senior associate editor Raghu Mohan talked to Usha Thorat, to RBI officials, big and small NBFCs, and to finance ministry officials to understand the full implications for  our cover story.

(This story was published in Businessworld Issue Dated 04-02-2013)