RBI Eases Some Restrictions on Shadow Bank Lending

Mumbai: The Reserve Bank of India (RBI) on Friday eased lending regulations governing the country's shadow banking industry, removing investor limits and the need for collateral guarantees on standard debt transactions.

The RBI said shadow banks would henceforth be able to conduct non-convertible transactions valued at Rs10 crore ($160,000) or more unsecured, and such issuance would no longer be limited to 200 investors.

Restrictions would remain on debt of less than that value that is not convertible into equity, and on all convertible debt, the RBI said.

India's shadow banks, known as non-banking financial firms (NBFCs), are widespread and include housing finance companies and consumer finance firms that lend small sums to individuals.

The central bank also said NBFCs would not be permitted to transfer the proceeds of non-convertible debt issues to affiliates.

India's NBFCs provide essential financial services in a country where only one household in two has access to formal banking. But there are concerns that, given the relatively loose regulatory environment they operate in, the bigger they grow, the greater the risk their activities may pose to the broader financial system.

Shadow banks are lending heavily to sectors like infrastructure without full banking licences and without being subject to the tougher rules imposed on commercial banks - even as the country's regular banks struggle with a pile-up of bad loans after years of reckless lending.

($1 = 62.2424 Indian rupees)