NBFCs expected Mor

To leading non-banking finance companies, the recommendations of the ‘Nachiket Mor Committee’ released by the RBI on Tuesday are like a banana to a hungry elephant.

NBFCs are a motley lot. Included under the same rubric are large, bulk lenders like the Power Finance Corporation, subsidiaries of foreign banks such as of Standard Chartered, companies like Sundaram Finance and Shriram Transport Finance who finance purchase of assets used for business (like trucks), those who lend money against pledged gold and a great number of cubby-hole localised, informal lending companies that give you money, if they know you, for buying a motorcycle or a three-wheeler.

That the regulations broadly sweep across the whole lot of them without any regard to their distinguishing characteristics has been an unremitting whine of theirs, which, apparently, has not reached the ears of Dr Nachiket Mor.

True or not, ever since the failure of CRB Capital Markets in 2000, the NBFC segment has been given an impression that the regulator dislikes them intensely. NBFCs think RBI sees them as companies that raise funds from the public and vanish, just because a few of them did. The irony is that the amount of public deposits with them is about Rs 7,000 crore; in contrast, banks have some Rs 40 lakh crore of public money as deposits.

As such, the adulatory words about them in the report of the ‘Committee on Comprehensive Financial Services for Small Business and Low Income Households’ – it observed that the NBFCs have “a great deal of continuing value to add” – held out hopes that some path-breaking recommendations would ensue.

Many NBFCs that Business Line spoke to said that while the recommendations had some positive features for them – such as allowing them to raise funds from abroad as ‘external commercial borrowings’ and making them eligible for seizing the assets of defaulters under the SARFAESI Act, just as the banks do – some of their biggest and long-standing demands have been given a go-by.

First of all, they have been asking for permission to raise more money from the market for the same amount of ‘own capital’. Banks need Rs 9 of their own for every Rs 100 they lend; NBFCs need Rs 15. The Mor Committee wants status quo.

To look at it from another angle, if a bank has Rs 9 of its own money, it need to borrow from the market only Rs 91 to be able to lend Rs 100. A NBFC can borrow only Rs 85.

Second, the Committee waves away the call for bringing ‘risk weights’ of the loans given by NBFCs on par with banks. A lower ‘risk weight’ means, again, lesser amount of own funds relative to the quantum of the loan. For example, if RBI prescribes 50 per cent risk weight for, say, home loans, a bank will need to Rs 4.5 (half of Rs 9) for every Rs 100 it lends.

Had these two demands been met, NBFCs would have more funds on their hands to lend. NBFCs are surprised these demands are not met, given the mandate of the Committee, which was to step-up access to formal credit to everybody.

Today, most Indians have no means of getting a loan from an institution, which is far cheaper than their current and only source, the local money lender. The Committee itself notes, “close to 90 per cent1 of small businesses have no links with formal financial institutions and 60 per cent of the rural and urban population do not even have a functional bank account.”

NBFCs, being the closest to the poor borrowers, claim they are best suited for achieving more ‘financial inclusion’. “Those who know financial inclusion the best are being excluded,” laments T.T Srinivasa Raghavan, Managing Director, Sundaram Finance Ltd.

Also, the Mor Committee wants to tighten the screws on NBFCs when it comes to bad loans. For banks, if a borrower has not paid interest for 90 days, the money lent to him is non-performing asset, and has to be provided for, (which means lower profits). NBFCs, could however, wait until 180 days before having to declare the loan as NPA. Here the committee wants to bring NBFCs on par with banks, though it says both types of institutions should follow ‘risk-based approaches’, rather than a generic, ‘number of days’.

Banks, however, could claim tax benefits for the ‘provision for NPA’, while NBFCs cannot. The Mor Committee is silent on this, presumably because tax issues come under Ministry of Finance, nothing to do with a RBI-set-up committee. However, one NBFC leader noted that even ‘external commercial borrowings’ is a MoF issue, on which the committee has said something.

The committee has called for abolition of the statutory set-apart of money borrowed from public, to be invested in specified, liquid bonds. Banks have to contend with a 23 per cent statutory liquidity ratio; NBFCs only 15 per cent. The Committee wants even this abolished. But NBFC leaders say this will benefit them only marginally.

ramesh.m@thehindu.co.in