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The Non-Banking Financial Companies (NBFCs) were in the news for quite some time with regard to their exposure, bank borrowings, quality of the assets and asset-liability mismatches. On the eve of the presentation of the budget, the debates and discussions became intense. There was a clamour for liquidity support from the authorities. It was expected that the union budget would address some of the concerns and provide necessary stimulus.
The consolidated balance sheet size of the NBFCs amounted to Rs. 28.8 trillion. The bank borrowings by NBFCs as a percentage of total borrowings have increased to 29.2 per cent from 21.2 per cent in March 2017. The capital adequacy measured in terms of capital to risk asset ratio (CRAR) declined to 19.3 per cent from 22,8 per cent in March 2018. The stress test conducted by RBI revealed that there is a potential threat to CRAR as it could decline even to 1.7 per cent which is far below the capital requirement of 15 per cent.
While presenting the budget the Finance Minister (FM) recognises that NBFCs play an extremely important role in sustaining consumption demand as well as capital formation in the small and medium segment. In this context the FM mentioned that NBFCs that are fundamentally sound should continue to get fundings from banks and mutual funds without being unduly risk averse. Some of the budget proposals for NBFCs are as follow (a) For purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of Rupees one lakh crore during the current financial year, Government will provide one time six months' partial credit guarantee to Public Sector Banks for first loss of up to 10%. (b) NBFCs which do public placement of debt have to maintain a Debenture Redemption Reserve (DRR) and in addition, a special reserve as required by RBI, has also to be maintained and (c) To bring more participants, especially NBFCs, not registered as NBFCs-Factor, on the Trade Receivables Discounting Systems (TReDS) platform, amendment in the Factoring Regulation Act, 2011 is necessary and steps will be taken to allow all NBFCs to directly participate on the TReDS platform.
Apart from the above the budget in the finance bill has proposed amendments/insertions to some of the sections of the RBI Act (45-IA, 45-IC, 45-ID, 45-IE, 45 MAA, 45 MBA, 45 NAA, 58 B, 58 G). for strengthening the regulatory authority of the RBI over NBFCs.
Section 45-IA is proposed to be amended to empower RBI to notify different amounts of net owned funds for different categories of NBFCs. Two new sections viz. 45-ID and 45-IE have been inserted giving powers to the RBI to remove directors from office and supersession of the board of directors for all NBFCs other than government companies. Section 45 MAA has been inserted to give powers to take action against auditors. 45 MBA has been inserted with regard to resolution of the NBFCs. Section 45 NAA has been inserted to direct any group company of NBFC to furnish financial statements. Section 58 B and 58 G have been amended to increase the fine for false declaration, return and information. The increased fine amounts to twenty five thousand in case of five thousand, one lakh in case of twenty five thousand and ten lakhs in case of five lakhs.
The RBI, should gear itself to monitor exposures in terms of bank borrowings, debentures and commercial payments, quality of assets, CRAR, asset-liability mismatch, and liquidity stress.
In the above context, it is important to mention that the financial stability report of RBI released on June 27, 2019 has put forth the exposures, asset quality, asset-liability mismatch and capital adequacy of the NBFCs. The report states that there are 9659 NBFCs registered with RBI as on March 31, 2019 of which 88 were deposit accepting and 263 were systematically important non-deposit accepting NBFCs. The consolidated balance sheet size of the NBFCs amounted to Rs. 28.8 trillion. The bank borrowings by NBFCs as a percentage of total borrowings have increased to 29.2 per cent from 21.2 per cent in March 2017. The capital adequacy measured in terms of capital to risk asset ratio (CRAR) declined to 19.3 per cent from 22,8 per cent in March 2018. The stress test conducted by RBI revealed that there is a potential threat to CRAR as it could decline even to 1.7 per cent which is far below the capital requirement of 15 per cent.
The budget proposals when read in conjunction with the financial developments of NBFCs, one would hasten to add that a good beginning has been initiated. Particularly, in the context of powers entrusted to RBI. The RBI, should gear itself to monitor exposures in terms of bank borrowings, debentures and commercial payments, quality of assets, CRAR, asset-liability mismatch, and liquidity stress.
(Pattnaik is a former Central banker and a faculty member at SPJIMR. Views are personal)