An RBI working group has recommended higher capital norms for Non-Banking Financial Companies and increased risk weights for those lending to commercial real estate and capital market sectors. The group also wants accounting norms and provisions applicable to banks be applied to NBFCs in a phased manner.

‘The Reserve Bank of India Working Group on NBFC Sector Issues and Concerns', headed by Ms Usha Thorat, former Deputy Governor, RBI, and now Director, Centre for Advanced Financial Research and Learning, released its report this morning.

The group was set up to review all regulations relating to the NBFC sector in the light of concerns about NBFCs exploiting gaps in regulation to carry on their business that is similar to banking business.

The fast growth in the NBFC sector, using public funds (deposits), has been a source of regulatory concern. The group has recommended retaining the minimum net owned fund requirement for all new NBFCs wanting to register with the RBI at Rs 2 crore till the RBI Act is amended. But the Group wants a minimum asset size of Rs 50 crore for any new NBFC. Existing NBFCs below this limit can deregister or may be asked to seek a fresh certificate of registration at the end of two years. The Working Group wants the Tier I capital for Capital to Risk Weighted Assets Ratio purposes set at 12 per cent to be achieved in three years by all registered NBFCs taking deposits or not. NBFCs not accessing public funds may be exempted from registration if their assets are below Rs 1,000 crore. The Thorat Group has suggested that NBFCs be subject to regulations similar to banks while lending to stock brokers and merchant banks, and similar to stock brokers, as specified by the Securities and Exchange Board of India, while offering margin financing.

The main theme of this report seems to be to bring NBFC regulations more in line with the rules that govern banks.

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