NBFCs: A Better Future Ahead

The passage of the Banking Laws Amendment Bill 2011, has put NBFC stocks in the spotlight. This is true especially of those companies who are actively seeking a banking license. One more factor that has added to the enthusiasm are the recent recommendations by the RBI for the NBFC sector. A panel headed by the former deputy governor of RBI, Usha Thorat has made certain recommendations which will tighten the ropes on the NBFC sector as a whole but ensure a better and safer functional environment. Here are some recommendations which will help in strengthening the NBFC sector going forward:

• Tier -1, or core capital of NBFCs, has been pegged at 12% from 7.5% now.
• The new provisioning rules will be 90 days instead of 180 days.
• The risk weights for NBFCs not sponsored by banks could be raised to 150% for capital market exposures and 125% for commercial real estate (CRE) exposures.
• A minimum asset size of over Rs 50 crore is required for registering a new NBFC.
• The panel has stipulated the maintenance of a statutory liquidity ratio of 15% of aggregate deposits for deposit accepting NBFCs, besides, making applicable ALM guidelines to those holding deposit of Rs 20 crore and above.
• Existing NBFCs will be given a period of 2 years with milestones for achieving the minimum threshold of Rs 25 crore of financial assets.
• All registered NBFCs, both deposit taking and non-deposit taking, should maintain high quality liquid assets in cash, bank deposits available within 30 days, money market instruments maturing within 30 days, investment in actively traded debt securities.
• Any change in shareholding of 25%, or more, will have to be approved by the RBI besides a suitable tax deduction on provisions.
• Financial entities having an asset size of Rs 1000 crore or above, holding financial assets which constitute 50% of the total assets OR generate financial income which as a proportion of the gross income is at least 50%, will need to be registered and regulated by the Bank.
• As per the extant regulatory framework, the Bank has stipulated the maintenance of a statutory liquidity ratio of 15% of aggregate deposit for deposit accepting NBFCs, besides, making applicable ALM guidelines to those holding deposit of Rs 20 crore and above.

At present, as per RBI data there are 12371 registered NBFCs as of November 2012. Out of these, 12104 is non-deposit taking NBFCs while 265 take deposits from retail investors. Going forward, the industry may witness some kind of a consolidation that will see many small players with regional reach being acquired by the larger ones.