The Reserve Bank of India (RBI) released the Usha Thorat committe report on non-banking finance companies or NBFCs. The report speaks about the issues and concerns of the NBFCs. (Thorat is a former deputy governor of RBI).
Some key recommendations of Thorat-committee:
Tier I capital of NBFCs to be at 12%
So far, NBFCs’ capital adequacy requirement is at 15% wherein there is no stringent stipulation of tier I or tier II capital. If the recommendation is accepted, every NBFC has to have a minimum tier I capital or equity capital of 12%.
Provisioning norms for NBFCs would be similar to those for banks.
In April this year, RBI increased provisioning norms for banks from 10% to 15% on sub-standard assets (where interest payments have not been made for two months) while restructured assets (where concessions have been given to the borrower to prevent the loan from going bad) too have to be provided at 2% as against 0.25-1% earlier. If accepted, NBFCs too have to follow this. NBFC heads feel such provisioning is good on a longer term basis. It has an income tax benefit. The proposed income tax deduction is seen as a big relief.
Liquidity ratio to be introduced for 30 days
RBI has recommended maintaining a liquidity ratio for 30 days, which means an NBFC has to set aside cash balance equivalent to its debt payments due every month. This debt may include repayment of bank loans, interest payment to bond subscribers and others. Asset finance companies, especially those with longer repayment cycle, may be impacted. The measure is perceived to be important to check asset liablity mismatch of NBFCs.
Risk weights for NBFCs, not sponsored by banks may be raised to 150% for capital market exposures and 125% for commercial real estates
This reflects RBI’s intention to bar NBFCs from taking higher exposure in capital market and real estate. Two such sectors are considered to be risk-prone and inclusive of high volatility. However, asset finance companies which basically do business of funding asset purchases would not be impacted due to this.
NBFCs may be given benefits under SARFAESI Act
Under Securitisation and Reconstruction of Financial Assets And Enforcement of Security Interest or SARFAESI Act, an NBFC would not move to the court to auction underlying assets to recover loan dues. It will just publish a newspaper notice before such auction. However, it hardly makes any difference for gold loan companies as gold is “pledged” against the loan.
The Reserve Bank of India released the Draft Guidelines for "Licensing of New Banks in the Private Sector". The Reserve Bank has sought views/comments on the draft guidelines from banks, non-banking financial institutions, industrial houses, other institutions and the public at large.
Final guidelines will be issued and the process of inviting applications for setting up of new banks in the private sector will be initiated. After receiving feedback, comments and suggestions on the draft guidelines, and after certain vital amendments to Banking Regulation Act, 1949 are in place.
Key features of the draft guidelines are:
(i) Eligible Promoters:
Entities / groups in the private sector, owned and controlled by residents, with diversified ownership, sound credentials and integrity and having successful track record of at least 10 years will be eligible to promote banks. Entities / groups having significant (10% or more) income or assets or both from real estate construction and / or broking activities individually or taken together in the last three years will not be eligible.
(ii) Corporate Structure:
New banks will be set up only through a wholly owned Non-Operative Holding Company (NOHC) to be registered with the Reserve Bank as a non-banking finance company (NBFC) which will hold the bank as well as all the other financial companies in the promoter group.
(iii) Minimum Capital Requirement:
Minimum capital requirement will be Rs 500 crore. Subject to this, actual capital to be brought in will depend on the business plan of the promoters. NOHC shall hold minimum 40% of the paid-up capital of the bank for a period of five years from the date of licensing of the bank. Shareholding by NOHC in excess of 40% shall be brought down to 20% within 10 years and to 15% within 12 years from the date of licensing of the bank.
(iv) Foreign Shareholding:
The aggregate non-resident shareholding in the new bank shall not exceed 49% for the first 5 years after which it will be as per the extant policy.
(v) Corporate Governance:
At least 50% of the directors of the NOHC should be independent directors. The corporate structure should be such that it does not impede effective supervision of the bank and the NOHC on a consolidated basis by the Reserve Bank.
(vi) Business Model:
Should be realistic and viable and should address how the bank proposes to achieve financial inclusion.
(vii) Other Conditions:
• The exposure of bank to any entity in the promoter group shall not exceed 10% and the aggregate exposure to all the entities in the group shall not exceed 20% of the paid-up capital and reserves of the bank.
• The bank shall get its shares listed on the stock exchanges within two years of licensing.
• The bank shall open at least 25% of its branches in unbanked rural centres (population upto 9,999 as per 2001 census)
• Existing NBFCs, if considered eligible, may be permitted to either promote a new bank or convert themselves into banks.
(viii) In respect of promoter groups having 40% or more assets / income from non-financial business, certain additional requirements have been stipulated.
These conditions may make it difficult for keen aspirants such as Religare Enterprises Ltd., Indiabulls Financial Services Ltd. and Reliance Capital Ltd. to qualify. Companies like Larsen & Toubro Ltd., Mahindra & Mahindra Financial Services Ltd., with a reasonably diversified shareholding, have a fair chance to gain banking licenses.
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