The Reserve Bank of India has asked non-banking finance companies (NBFCs) to desist from contributing capital to any partnership firm or be a partner in partnership firms.
In the case of existing partnerships, NBFCs should seek early retirement from the partnership firms, the central bank said in a notification to all NBFCs.
This directive comes in the backdrop of the RBI coming across some NBFCs having large investments in, or contributed capital to, partnership firms.
Industry experts are divided in their opinion on the RBI action. While one segment feels that the blanket ban is unwarranted and should have been restricted to only deposit-taking NBFCs, the other segment is of the view that the move is justified as an NBFC's funds could be at stake if a partner surreptitiously withdraws from a partnership firm.
NBFCs, especially non-deposit taking, contribute capital to or invest in a partnership firm, which is in the business of investments, to get higher returns, say experts.
“Unlike a public or a private limited company, a partner can call it quits any time from a partnership firm. So, if an NBFC has invested in such a firm and the latter fails, then it could have an adverse ripple effect on the former, its depositors and creditors (banks). So, the RBI's move prohibiting NBFCs from contributing capital to any partnership firm or being a partner in a partnership firm is justified,” said Mr D. R Dogra, Managing Director, CARE Ratings.
Diversion of funds invested by NBFCs in partnership firms into sensitive sectors such as capital markets and commercial real-estate could be causing concern to the regulator, he added.
According to Ms Bhavna G. Doshi, Vice-President, Indian Merchants' Chamber, the RBI should have barred only deposit-taking NBFCs from investing in partnership firms.
Rising bank credit
The RBI's latest move on NBFCs is significant, coming as it does in the backdrop of bank credit to NBFCs growing by leaps and bounds in the last one year. Credit growth to NBFCs at 46.4 per cent on a year-on-year basis in February 2011 was significantly higher than the growth of 19.8 per cent during the corresponding period of the previous year, according to Reserve Bank of India.
As on February 25, 2011, banks' credit to NBFCs stood at Rs 1,58,738 crore, compared with Rs 1,08,427 crore as on Feburary 26, 2010, and Rs 90,521 as on February 27, 2009.
NBFCs operating in segments such as gold loans, commercial vehicles, and housing are tapping banks for credit in a big way to grow business.