While recognising the significant role played by NBFCs in providing finance, the Working Group of FSLRC said deposit-taking NBFCs must obtain a license to operate as a bank so that it would fall within the regulatory purview of the banking regulator
The Working Group (WG) set up by the Banking Financial Sector Legislative Reforms Commission (FSLRC), has recommended that non-banking financial company (NBFC)'s which accept deposits must obtain a license to operate as a bank and will fall within the regulatory purview of the banking regulator.
The WG headed by Kishori Udeshi, former deputy governor of the Reserve Bank of India (RBI), said, “...deposit taking NBFCs, and functionally provides the same service as a bank. Yet there is neither a level playing field nor equal treatment between banks and NBFCs. A deposit taking NBFC is not subject to the same prudential regulations (such as branch licensing) as is applicable to a bank. This gives NBFCs a competitive advantage over traditional banks."
“The class of NBFCs that do not accept deposits from public will not be regulated by the banking regulator. Such NBFCs will be regulated by the Unified Financial Authority (UFA),” the WG said in its report.
Recognising the role played by NBFCs in providing finance, the WG said that credit linkages between banking and non-bank finance should be subject to appropriate regulatory oversight from the viewpoints of both micro-prudential regulation and systemic risk regulation.
After showing a steady increase till 2007, public deposits of NBFCs declined sharply by end-March 2011. However, at the same time, the sizes of assets have grown steadily, indicating greater demand for the services provided by these companies. A major reason for the decline is the stringent regulatory regime towards deposit-taking NBFCs which has resulted in a reduction of the number of NBFCs and the amount of deposits with them. Consequently, there has been migration of depositors towards the banking system, which is better regulated and supervised.
As the Deposit Insurance and Credit Guarantee Corporation (DICGC) does not insure these deposits, and these entities carry out activities similar to that of banks without being subject to the full purview of banking regulation, it raises concerns about consumer protection and ensuring the stability of the financial system, the WG report said.
At present only banks, public financial institutions and housing finance companies are allowed to avail of the privileges granted to creditors under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). Institutional lenders such as NBFCs, deposit or non-deposit taking, cannot avail of the privileges under SARFAESI Act, unless the Government of India (GOI) notifies that a particular NBFC is a “financial institution" under SARFAESI Act. This creates an unequal playing field, where banks and financial institutions are better off than NBFCs when it comes to recovery of debts. There is therefore merit in extending the privileges of the SARFAESI Act to other institutional lenders, which are regulated by the RBI as it would level the playing field.
The WG group said there is a need to amend the SARFAESI Act to allow all secured creditors who are regulated entities under the purview of the Act.