INDIA BUSINESS WORLD - OCTOBER 2006
THE MONTH THAT WAS...

RBI TO MODIFY NBFC POLICY TO BLOCK FOREIGN, DOMESTIC BANKS

THE banking regulator is close to firming up a policy that will virtually make it impossible for foreign and local banks to operate through the non-banking finance companies (NBFCs) route. It could well force banks to take the hard decision of operating either through a branch network or through an NBFC, officials familiar with the exercise. RBI's aim is to stop banks from taking advantage of a regulatory arbitrage. Such possibilities exist as NBFCs, unlike banks, are not bound by strict norms on raising funds and their end use.

RBI and the government are wary of the mushrooming of these NBFCs and attempts by banks, specially foreign ones, to skirt the branch licensing norms by lending to retail consumers through their NBFCs. Besides, they are apprehensive of the exposure of some leading NBFCs to the capital market.

 The concern arises from the fact that these companies have sourced funds from banks to fund capital market transactions, which, it is feared, could have a systemic impact. The regulator's unease has been reflected in its note to the government seeking a change in the norms to exclude FDI in NBFCs from the automatic approval route. Senior government officials said RBI had raised concerns relating to NBFCs with the finance ministry.

Leading foreign banks in India such as Citi and Stan-Chart have their NBFCs, which primarily target the consumer finance, SME and truck finance segments in the country. Citigroup's NBFC has a branch network of over 400 compared to its bank network of 39. Stan-Chart, which had last year launched an NBFC, has a network of around 25 as against its branch network of 81. GE Money, which is looking at starting banking operations in the country, has a branch network of over 170.

ASIA Financial Holdings, a wholly-owned Temasek subsidiary, had acquired a Chennaibased NBFC and has renamed it under the banner of First India Credit Corporation. It also has a branch network of over 30.

However, the RBI has not issued fresh NBFC licences to a host of other foreign banks and private sector banks. NBFC licence proposals from HSBC, Deustche Bank, HDFC Bank, along with many others, are pending with the RBI. Others, who have gone through the acquisition route to buy stake in existing NBFCs — like Barclays, Goldman Sachs and Soc Gen — are still awaiting RBI approval.

Currently, an NBFC has no restriction on the branch network. In contrast, there are severe restrictions on opening bank branches with the annual cap in India being 20, which is in excess of the WTO commitment.

In a few instances, foreign banks want to establish NBFCs, as these entities primarily target the consumer finance segment, which has a different risk profile — marked by high risk and high gains. What policy managers may insist now is that the banking company must operate all its businesses within the bank rather than using NBFCs to tap clients.

On the cards are norms on capital adequacy ratio (CAR) for non-deposit taking NBFCs. The non-deposit taking NBFCs are not constrained by any rules on capital, which are applicable for deposit-taking NBFCs. With no fetters on capital raising, they normally leverage themselves between six and ten times by borrowing through commercial paper. In recent times, it has been noted that some of them had raised money through CPs and then lend to their high net worth clients to play in the stock market. Bank financing to non-deposit taking NBFCs may well be choked as part of the overall policy.

According to RBI, of the deposit-taking NBFCs, 16 companies, with an asset size above Rs 500 crore, account for 48.6% of the aggregate deposits of Rs 3,777 crore of the sector. As regards non-deposit taking ones, there are 104 companies (excluding government entities, primary dealers and holding companies) with an asset size of Rs 100 crore and above.

In this segment, Citi group, with five group companies, heads the list in terms of aggregate assets, followed by GE Capital and its associates. Incidentally, of these 104, about 10 companies hold assets forming 43.3 % of the total assets of this segment. Of these 10 companies, 5 are foreign-owned companies. These 5 companies together account for a significant share of bank borrowings, CPs and the debentures raised by this sector (excluding government companies, PDs and holding companies). Besides, some NBFCs have raised large amounts of bank funds to fund their capital market operations.