Reserve Bank tightens rules for NBFCs, raises minimum capital requirement

The Reserve Bank of India (RBI) has tightened rules for so-called "shadow banks", raising minimum capital requirements and restricting deposits with a set of changes that it hopes will protect consumers and the market without stifling growth.

Non-banking financial companies (NBFCs) such as LIC Housing Finance, provide a variety of banking services for both firms and individuals. They have been lending heavily to sectors like infrastructure at a time when traditional banks are held back by, among other things, hefty bad loans.

However, NBFCs do not hold full banking licences and are not subject to the tougher rules imposed on commercial banks.

The central bank, which has long warned of the risks posed by unregulated financial firms, said on Monday that their growth meant NBFCs could now pose risks to the broader market. A senior RBI official said in September that the bank recognises roughly 12,000 registered NBFCs.

"NBFCs are now deeply interconnected with the entities in the financial sector," the central bank said in a statement on Monday.

"Being financial entities, they are as exposed to risks arising out of counterparty failures, funding and asset concentration, interest rate movement and risks pertaining to liquidity and solvency, as any other financial sector player," it added.

The new rules are meant to replace a set of loose guidelines that had previously governed the NBFC sector, which has grown rapidly in recent years. Analysts estimate NBFCs account for about 12 per cent of the total assets in the domestic financial sector.

RBI tightened Tier 1 capital requirements and said NBFCs would need to hold capital levels of at least of Rs 1 crore ($162,668) by the end of March 2016 and Rs 2 crore by March-end 2017 to avoid losing their right to operate.

The country's apex bank also said only certain investment-grade NBFCs would be allowed to take deposits, saying the firms would have until the end-March 2016 to acquire a credit rating. RBI capped deposit-taking at 1.5 times the size of a firm's minimum capital - down from four times previously.

The central bank said the new rules would address risks posed by these firms "without impeding the dynamism displayed by NBFCs".

An executive at one of the country's biggest NBFC said the RBI would continue to tighten rules.

"RBI is slowly and steadily removing all kinds of arbitrage possible," he said, declining to be identified because he was not authorised to talk to the media. "To that extent, I am more inclined to believe, this is not the last of it," the executive said.

(Reuters)