New NBFC regulations: It's advantage banks

In order to create a level playing field and avoid arbitrage opportunities between banks and non-banking finance companies (NBFCs), the Reserve Bank of India introduced tighter norms which will affect the way some NBFCs operate.

 

The new guidelines introduced by RBI says that NBFCs will require a higher minimum capital, raise funds to meet the minimum net owned funds limit, while at the same time capping and reducing the deposit acceptance limit and bringing in the same set of norms that are used by banks to recognize non-performing assets (NPAs). Thankfully for the NBFCs, the central bank has given them time till March 31, 2018 to get their houses in order Stock Market Tips

 

RBI recommendations are in line with those suggested by theUsha Thorat committee and suggestions made by member of Central Board of the RBI, Nachiket Mor.

 

The impact of the suggested norms is likely to be mixed for various players in the sector. The conservative players are generally in line with most of the norms suggested by RBI or might require some tweaks. Given the timeline of more than three years, they will be able to meet these guidelines. However, there is no denying the fact that life will be tougher for them post 2018 Free Share Tips

 

It is the aggressive players in the sector who will be badly affected. The hit will be structural and thus permanent in nature rather than financial. NBFC players generally target those consumers who are either rejected by banks or in areas where banks have little presence. The risk element is higher for these players. Further, they lend to business or individuals whose cash flows are not regular, such as truck operators, especially who cater to agriculture industry. Earnings for these players are seasonal and are dependent on the monsoon.

 

In a CNBC interview, GS Sundararajan, MD of Shriram City Union Finance did not mince words on the recommendation saying that if India is to follow such stringent global rules, it is best not to talk about financial inclusion Free stock Trading Tips  

 

Not only commercial vehicle finance companies, but housing finance companies will also be affected by the norm where they will have to align their ratio of deposits to net worth at 1.5 times. Deposits are one the main source of funds for housing finance companies. The RBI’s move will mean that in order to keep pace with the growing demand of housing sector, NBFCs will have to look at other sources of funds.

 

For gold finance companies, there seems to be some relaxation in terms of capital requirements. Nischint Chawathe, senior analyst with Kotak Institution Equities in an interview with CNBC said that players in this industry are already following stringent norms, and the very fact that the regulator now has a positive stance on this segment is good.

 

There is little doubt that RBI’s effort will reduce arbitrage between NBFC and banks, but in the end the scale is clearly tilted towards the banks. Risk taking ability was the biggest differentiator between a bank and a NBFC. RBI’s norms has reduced NBFC’s ability to take extra risk and at the same time affected their fund raising ability from traditional sources Commodity Trading Tips