Industry body ASSOCHAM has opposed the government’s classification of non-performing assets (NPAs) belonging to non-banking financial companies (NBFCs) which provides for secured and unsecured advances if the overdue period exceeds 90 days.
Under the existing norms, an unsecured asset overdue beyond 90 days and a secured asset overdue beyond 180 days are treated as NPAs.
“NBFCs are a major source of funding for unorganised sector of the economy. The revised classification will eventually increase capital requirements of NBFCs and their cost of lending,” said ASSOCHAM in response to draft recommendations of the Reserve Bank of India (RBI) Working Group.
It also suggested an enhanced time frame of five years due to difficult and uncertain economic conditions for tier one capital for capital to risk weighted assets ratio (CRAR) at 12 per cent – instead of within three years as proposed by the group.
NBFCs should be allowed to deploy surplus liquidity in government securities, treasury bills and money market with maturity beyond 30 days. For computing total financial assets, cash and bank deposits, such instruments may be deducted and treated as part of financial assets, said ASSOCHAM secretary general D.S. Rawat.
On regulating loans to stock brokers and merchant bankers, it suggested that status quo may be maintained as the present restriction of capital market exposure of 10 per cent of net worth by banks will restrict the ability of NBFCs to lend to this sector.
To increase CRAR from 100 to 150 per cent for capital market exposure and 125 per cent on real estate exposure, the chamber said this will increase the cost of borrowing for NBFCs and also be a deterrent for banks to lend to NBFCs.
Borrowing through external commercial borrowings (ECB) route or NBFC is currently prohibited. It should be allowed so that NBFCs have a window to raise funds at substantially low rate of interests.
Any further tightening may create systemic risk for the sector. Mr Rawat said no asset size ceiling should be insisted if the NBFCs are not accessing public funds for registration with the RBI.
Inter-corporate deposits may be excluded from the definition of public funds where the lending company has not received any public funds and both the lending as well as borrowing company belong to the same group.
As the term business has not been defined, companies which are holding long-term investments in shares of group companies (and thus are merely investment companies) may not be considered as carrying on the business of NBFC’s.
To tackle the problem of bad assets and asset recovery, the RBI Working Group has proposed that NBFCs should be brought under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act. The chamber said it is a bold step and NBFCs should be able to access the service of Debt Recovery Tribunals as well.
Existing non-deposit taking NBFCs having a net worth above Rs 500 crore and desirous of converting to NBFCs-D should be allowed to do so automatically with intimation to the RBI.
Also, assessing officers may be directed to issue nil tax deducted at source (TDS) certificates wherever the customer base exceeds 1,000 subject to the condition that the assessed pays an advance amount equal to the average of its tax paid in last three years.
NBFCs account for nearly 12 per cent of advances of the total financial system and can play a major role in furthering financial inclusion. There are 12,630 NBFC’s registered with the RBI providing credit delivery in asset financing and hire purchase. In 2010-11 they delivered credit to the tune of Rs 4.62 lakh crore.