NBFCs Five Point Agenda For The Finance Ministry And The RBI

Calling for a long-term vision for the development of the NBFC (Non Banking Financial Companies) sector in India, the CII (Confederation of Indian Industry) has suggested a five point agenda to be taken into consideration by the Ministry of Finance and the Reserve Bank of India.
 
The Agenda focuses upon:
 
·Meeting the funding requirements of the sector adequately.
·Maintaining the existing NPA classification norms.
·Bringing NBFC sector under the ambit of the SARFAESI Act.
·Addressing concerns on Capital Adequacy requirement.
·Resolving tax related issues.
 
Under present conditions, NBFCs are facing a number of issues which have remained un-addressed for the sustainable growth of the sector, relating to not meeting demand for funds, raising core capital, proposed NPA classification norms, lack of legislative framework for safeguarding depositors' interest and strengthening customer protection and non-parity with banks on taxation.
 
Owing to the prevailing economic downturn, the NBFC sector is also showing signs of stress as witnessed from the steep rise in NPAs (Non Performing Assets). Further, with high interest rates and reduction in lending by banks, NBFCs are facing the dual impact of rising credit costs and are operating in very tight liquidity situation.
 
Policy and regulatory changes relating to removal of the priority sector lending status on bank loans to NBFCs from 1st April, 2011 (except to eligible micro finance institutions), restrictions placed on providing credit enhancement in bilateral assignment transactions under the revised securitisation guidelines of August 2012 and the sectoral cap of 30% on mutual funds’ debt investments by SEBI in October 2012, have put lot of hardships for NBFCs in raising funds at competitive rates resulting in higher cost to the end borrowers.
 
In case of the NPA classification norms, at present, NBFCs need to classify a loan as NPA if the borrower defaults for 180 days as against 90 days for banks. The RBI has suggested the 90 day rule to apply for NBFCs too. Since NBFCs cater to unbanked customer segment with no collaterals and irregular cash flows, there is a need for maintaining the existing norms.
 
To give a boost to the NBFC sector, there is a need for a robust framework for safeguarding depositor’s interest and strengthening customer protection such as, extension of the SARFAESI Act (banks utilise this act as an effective tool for bad loans recovery). It is possible where non-performing assets are backed by securities charged to the bank by way of hypothecation or mortgage or assignment to the NBFC sector will go a long way towards the orderly growth and development of the sector. This much needed reform will provide a level playing field for NBFCs vis-à-vis banks and empower them to recover their NPAs without court’s intervention.
 
On the capital adequacy front, RBI’s draft norms prescribe the tier-I capital be raised to 10%, from the existing 7.5%. For captive NBFCs, it was proposed to be raised to 12%. The RBI over the last five years has increased the total capital adequacy ratio floor from 10 to 15, due to which NBFCs have been consistently raising capital in the past years. In the current scenario, there is a strong case for maintaining the existing tier-I capital ratio, given the difficulties faced by NBFCs in raising equity.

Among the major taxation related issues of the NBFC sector are the extension of exemption on TDS in line with Banking Companies, LIC and other Public Financial Institutions, allowing of Provision for NPAs and removing withholding tax on borrowing via ECB (External Commercial borrowing).
 
If in future RBI and other concerned authorities consider these recommendations and implement them, NBFCs like IDFC Power Finance Corporation, IFCI will be benefited from the move as it will give better clarity regarding policy and regulatory frame work.