NBFCs' Demand To Become Like A Bank Uncharacteristic: RBI Deputy Governor Rajeshwar Rao

The demand of non-banking financial companies to become like banks is uncharacteristic, according to RBI Deputy Governor Rajeshwar Rao.

Under the Reserve Bank of India's regulations, NBFCs are not entitled to accept public deposits. Only those with specific authorisation by the central bank and having an investment grade rating are allowed to accept public deposits to a limit of 1.5 times the amount of net-owned funds.

However, there have been intermittent demands from the NBFCs to allow public deposits, Rao said at the sixth edition of the Confederation of Indian Industry's NBFC Summit in Mumbai on Friday.

"The NBFCs have evolved as niche companies serving specific economic functions, and it is uncharacteristic for them to demand becoming like banks," the deputy governor said.

"It is indeed the non-acceptance of public deposits by the NBFCs, which provides the regulatory comfort to the Reserve Bank to have lower entry barriers for (the) NBFCs, allow them to specialise in any specific sector of their choice and have lower exit barriers to wind up their businesses," he said.

In fact, the RBI's approach has been to disincentivise deposit-taking activities of the NBFCs. The number of deposit-taking NBFCs has decreased from 241 in March 2014 to 26 in September last year, according to Rao.

He said the central bank would consider some specific areas for harmonising regulations on corporate governance for the NBFCs.

Regulations between banks and the NBFCs have been harmonised in some areas. For certain NBFCs, especially upper-layer NBFCs, it has been strengthened under scale-based regulations, he said. "Significant differences continue to exist between the regulations applicable to banks and (the) NBFCs."

Rao highlighted that the regulatory scrutiny for an applicant of a banking licence is much more rigorous than the scrutiny for an NBFC licence applicant, primarily to reflect the access of public deposits through a bank licence.

The NBFCs have no requirements on priority sector lending, unlike banks and small finance banks, he said.

Rao said non-bank lenders with peer-to-peer lending model were underplaying risks through various means, such as promising high returns, structuring the transactions and providing anytime fund recall facilities. He underlined that "any breach of licencing conditions and regulatory guidelines is non-acceptable".

The deputy governor reiterated that concentrated linkages between banks and the NBFCs, coupled with high leverage, might create contagion risks in the financial system.

"Concentration of funding sources for (the) NBFCs is also not a prudent strategy as they may face sudden drying up of such funding during stress events. Therefore, it is prudent for (the) NBFCs to focus on broad-basing their funding sources and reduce overdependence on bank credit," he said.

"Besides improving the ease of lending, (the) NBFCs should equally focus on maintaining the quality of their loan portfolio."