New regulations by Reserve Bank of India (RBI) may result in 2,000 or more non-banking financial companies (NBFCs) either giving up their operations on their own or seeing their licences cancelled, according to estimates by the Association of NBFCs.
The new stipulations mandate that net owned funds (paid-up equity and reserves) of NBFCs should be Rs 1 crore by March 2016 and Rs 2 crore by March 2017. It is also mandatory that 50% of the assets owned by them should be financial assets and 50% of the income from should come from financial assets.
Raman Aggarwal, chairman of Finance Industry Development Council, told dna, "We expect up to 2,000 companies registered as NBFCs to either lose their licences or give them up as the RBI is strictly mandating only asset financing companies to be in operation. Some of the licences will also get cancelled for violations."
Some of the entitites are so small that they will either have to give up their licences or RBI will cancel them. This is to ensure that only the serious asset financing NBFCs stay operational.
TT Srinivasaraghavan, managing director, Sundaram Finance, told dna, "I am not sure about how many NBFCs will lose their registrations. But it will not have any impact as they are mostly in the nature of core investment companies and asset financing companies like ours. Even these companies number only around 300. With regulations getting stricter, many NBFCs will lose their licences but it will have no impact on the sector."
There are about 12,000 NBFCs and about 85% are small and medium-sized. "RBI also acknowledges that the NBFCs are over-dependent on banks for funds. There is an equity funding and securitisation route but refinance window is necessary for the robust development of the sector," said Aggarwal.
Funding is a major hurdle for the sector with most NBFCs depending on banks.
Aggarwal said, "We met the RBI governor Raghuram Rajan last month and apprised him about the funding difficulties, specially in the context of the regulatory framework becoming same for both banks and NBFCs. We have also requested the central bank to open up a refinancing window for NBFCs.
Earlier, NBFCs enjoyed an 180-day window before they had to classify the loan as a bad loan. Now, they have to classify it as a bad loan in 90 days, at par with banks. Exporters, small and medium enterprises (SMEs) and housing finance companies -- which are also NBFCs -- have a refinance facility."
The risk weights for the sector are also higher than banks. The risk weights irrespective of the asset class is at 100% for the NBFCs but for funding stocks and real estate it is 150%.
Aggarwal said, "We don't mind higher risk weights for riskier assets, but for segments like construction equipment and commercial vehicles, the RBI needs to reduce the risk weights so that the sector is not squeezed out of funds."
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