This Article is From Nov 10, 2014

Reserve Bank Tightens Rules for NBFCs, Raises Minimum Capital Requirements

Reserve Bank Tightens Rules for NBFCs, Raises Minimum Capital Requirements

Mumbai: The Reserve Bank of India (RBI) has tightened rules for so-called "shadow banks", raising minimum capital requirements and restricting deposits with a set of changes that it hopes will protect consumers and the market without stifling growth.

India's non-banking financial companies (NBFCs) such as LIC Housing Finance Ltd provide a variety of banking services for both firms and individuals. They have been lending heavily to sectors like infrastructure at a time when traditional banks are held back by, among other things, hefty bad loans.

But NBFCs do not hold full banking licences and are not subject to the tougher rules imposed on commercial banks.

The RBI, which has long warned of the risks posed by unregulated financial firms, said on Monday that their growth meant NBFCs could now pose risks to the broader market. A senior RBI official said in September that the bank recognises roughly 12,000 registered NBFCs.

"NBFCs are now deeply interconnected with the entities in the financial sector," the RBI said in a statement on Monday.

"Being financial entities, they are as exposed to risks arising out of counterparty failures, funding and asset concentration, interest rate movement and risks pertaining to liquidity and solvency, as any other financial sector player."

The new rules are meant to replace a set of loose guidelines that had previously governed the NBFC sector, which has grown rapidly in recent years.

Analysts estimate NBFCs account for about 12 per cent of the total assets in the country's financial sector.

The RBI tightened Tier 1 capital requirements and said NBFCs would need to hold capital levels of at least Rs 1 crore ($162,668) by the end of March 2016 and Rs 2 crore by end-March 2017 to avoid losing their right to operate.

The apex bank also said only certain investment-grade NBFCs would be allowed to take deposits, saying the firms would have until the end of March 2016 to acquire a credit rating. It capped deposit-taking at 1.5 times the size of a firm's minimum capital - down from four times previously.

The RBI said the new rules would address risks posed by these firms "without impeding the dynamism displayed by NBFCs".

An executive at one of the country's biggest NBFC said the RBI would continue to tighten rules.

"RBI is slowly and steadily removing all kinds of arbitrage possible," he said, declining to be identified because he was not authorised to talk to the media.

"To that extent, I am more inclined to believe, this is not the last of it."

($1 = 61.4750 rupees)

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