Reducing leverage of NBFCs operating with public funds is the aim: Usha Thorat

A holiday in Turkey is the wrong time to interrupt anyone on official matters. Still, when the Reserve Bank of India released the report of its working group on the NBFC sector this morning, one had no choice but call Ms Usha Thorat, Chairperson of the group for her insights. Ms Thorat, a former Deputy Governor of the RBI, is currently Director, Centre for Advanced Financial Research and Learning (CAFRAL). Ms Thorat was just about to take a cruise down the picturesque Bosphorus strait in Istanbul that divides Asia and Europe, but graciously gave a few minutes to explain the approach of her panel and what they tried to achieve in their report. Despite the noise (one could hear some announcements on a loudspeaker in the background), she readily answered a number of questions and was able to recall the highlights and intricate details of the report from memory. Asked about this, she said with a laugh, “We have been steeped in this for the last eight months.”

 She was at pains to emphasise that her panel has tried to address both regulatory as well as the industry's concerns. Ms Thorat allayed misgivings expressed by a section of the NBFC industry, which wondered whether the proposed ‘regulations' would do them in. She said, this was clearly not the intention. She said NBFCs had played an important role in the economy, especially in improving last mile connectivity. Asked if the higher norms on capital adequacy (Tier-1 capital to be 12 per cent in three years) were not too stringent, she said the aim was to reduce leverage that an NBFC enjoyed today with public funds.  Currently, an NBFC can borrow up to 12 times its own funds. This would come down to about eight times when the proposals come into force. Asked if NBFCs would not find it difficult to meet this requirement if their profit-generating capacity was also hampered, she said that their return on equity (RoE) and return on assets (RoA) were quite high and this was attracting a lot of capital into those sectors. While conceding that there may be a temporary difficulty for NBFCs in terms of costs of funds, the former Deputy Governor of the RBI pointed out that the regulations proposed were over a three-year timeframe and expressed confidence that they would be able to find the resources. Ms Thorat said that the attempt of her panel was to minimise scope for regulatory arbitrage and plug the gaps that were currently there. She pointed out that in the case of lending for margin financing, stock brokers have to abide by SEBI guidelines, while banks have to abide by RBI guidelines. But for NBFCs there are no regulations. Further, she said, “We have addressed certain important issues such as ‘concentration risk' and ‘funding risk'. There are many NBFCs which are basically single product companies — whether it is truck financing or gold loans or equipment financing — and these face concentration risks. “And there are NBFCs which are into capital markets business or real estate business which lend long-term on the basis of short-term borrowings. We have addressed the concentration risk issue by prescribing higher capital adequacy norms and funding risks by bringing in asset liability management (ALM) guidelines.” Elaborating, she said that the working group had recommended a liquidity ratio for NBFCs to act as a buffer in the event of any kind of stress up to a period of 30 days — in the first instance.  So, all NBFCs, both deposit taking and non-deposit taking, should hold cash or government securities equal to the gap between their total inflows and outflows up to the 30-day period. Beyond that period, there would be time to arrange appropriate resources or liquidate necessary assets in the event of a crunch, she said.

HBL 

Katrina or Kareena?

Who’s better looking, Kareena Kapoor or Katrina Kaif? It’s not some film-glossy that’s asking the question, but RBI Governor D Subbarao. Yup! While making a presentation on the macro-economic situation, the dull powerpoint suddenly brightened up with pictures of the two actresses. It seems Subbarao’s intention was not to get the audience to focus on just the generous dose of skin. It’s easy to go along with the dominant view—which Subbarao said was that Kareena was more beautiful—the RBI Governor said, but if someone has a different view (that Katrina is better looking), he or she should express it. A different view, he said, would help policymakers firm their view on things. Subbarao would do well to read the beginning of Raghuram Rajan’s book. Rajan points out that when, in 2005, he expressed scepticism at Jackson Hole about whether the world was riskier now—this was when the economists were gathered to toast Ben Bernanke’s sage leadership at the Fed!—he felt like Daniel with the lions.

FE

Practise economics as people matter: Subbarao



The Finance Minister, Mr Pranab Mukherjee, flanked by the RBI Governor, Dr D. Subbarao, and the Deputy Chairman, Planning Commission, Mr Montek Singh Ahluwalia, at the Golden Jubilee Celebrations of the Indian Economic Service in the Capital on Monday



The Reserve Bank of India (RBI) Governor, Dr D Subbarao has outlined five principles that economists in the Government must keep in mind while shaping economic policy. Addressing the inaugural function of the golden jubilee celebrations of the Indian Economic Service (IES) here, Dr Subbarao highlighted that the global financial crisis of 2008 was in many ways a wake-up call for economists to introspect on their profession, on their scholarship and on their professional conduct. The first principle, he said, that economists need to remember is to practice economics as a people matter, which is other way of saying that economics is not physics. “Economists should remember that they deal with world of people. Economics is not like physics because it deals with real world of people, its laws are not immutable and knowledge progression in economics is one way street”, Dr Subbarao said. The second principle is that when economists build models, they should fit it to the real world and not the real world to the models. “The models that have been built by economists are dictated by convenience and not conviction. Economists model what they can and not what they should”. Dr Subbarao said that macroeconomics is not aggregation of microeconomics as models assume. The other principles that economists would do well to remember is that economic policy making is more than straight application of text book knowledge, need to apply judgement, avoid group think and have a sense of history. “The stereotype reply from economists is that they didn’t see the crisis coming because the world had changed. It’s very important to have a sense of history in order not to repeat mistakes, at least learn from them. You can never prevent another crisis but at least you can mitigate the chances of a crisis blowing up or indeed if a crisis were to occur you will be well equipped to handle it”, Dr Subbarao said.

HBL

Religare hails RBI’s draft guidelines on new bank licences; keen to enter banking

..."The draft guideline has put the rightful emphasis on the promoters/promoter group and their track record and business interest. We believe we qualify on all the criteria set out in the draft guidelines.....

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Public or private sector banks: who fought rate battle better?

The battle of surging interest rates is continuing since a long time now. In the period between March 2010 to August 2011, the Reserve Bank of India has raised policy rates by as much as 325 bps. Also savings bank rates were raised to 4% this fiscal. In response to this pressure, how well have public sector as well as private sector banks faired? Both these bank classes have shown a decline in terms of net interest margin (NIM). The dip in NIM has been from 3.3% in Q1 to 3.1% in Q2 of this fiscal. Also there has been a rise in the level of NPAs from 2.01% to 2.10% for the same period as above. In terms of CASA ratio, private sector banks had a higher share of 34.25% as against 31% for the public sector counterparts. Similarly credit deposit ratio was 83% for private banks while it was 72% for public sector ones.

Rupee Times

KKR Appoints DS Brar as Senior Advisor

MUMBAI, India & NEW YORK--(BUSINESS WIRE)--Kohlberg Kravis Roberts & Co. L.P. (together with its affiliates, “KKR”) today announced the appointment of DS Brar as a Senior Advisor to the firm. “I am honored to have the opportunity to work with KKR in bringing value to both Indian and global companies across a broad range of offerings.”  Sanjay Nayar, a Member of KKR and head of the firm’s India operations, said, “DS Brar is one of the most respected business managers in India. He has a breadth of business, economic and government experience, and we are very pleased he will bring his expertise to bear on our current and prospective investments as a Senior Advisor to the firm.” Mr. Brar currently holds Board positions in various Indian and international companies. From 2000 to 2007, Mr. Brar served as a Director of Reserve Bank of India (RBI) and was also a Member of the Inspection and Audit Sub-Committee of the Central Board of Directors of the RBI. In his new role for KKR, Mr. Brar will also serve on the firm’s Asia portfolio management committee, which interacts with company management, monitors all of KKR’s private equity investments in the region, and provides guidance and input on the operations of the   companies. 

http://www.businesswire.com/

NBFC recos don't require legal changes: Usha Thorat

The Reserve Bank of India (RBI) on Monday released the Usha Thorat committee report on non-banking finance companies (NBFCs). In an interview to CNBC-TV18, Usha Thorat, director, Centre for Advanced Financial Research said, the whole objective was to look at systemic risk and to look at issues of regulatory arbitrage. “We need more uniform regulations to reduce arbitrage,” she added. She further said, NBFC recommendations do not require legal changes.

Q: What were the principles on which this committee made its recommendations?

A: Let me tell the broad principle. We wanted to give the whole objective of regulation, a very focused objective.

We had been dealing with the problem of deposit taking companies right from 1997-1998 and that had largely been taken care of. We started focusing on non-deposit taking companies, which were accessing public funds from 2006. By the beginning of this year we felt that we needed to rationalise the whole process of regulatory and supervisory focus. And that is why this working group was set up. So, the whole objective was to look at systemic risk and to look at issues of regulatory arbitrage.

Q: I am sure you must have studied a lot of loans lent by banking sector to NBFCs and on lent by the NBFCs to various sectors. Where did the committee see red flags?

A: Before we look at the red flags, let’s look at the whole strength of this sector. It’s a very heterogeneous sector, but it provides a financial services and credit to sectors in very niche areas. So, it is very innovative, very heterogeneous, very last mile connectivity possible and capable of a fair degree of innovation. So, we did feel that there was a role for this sector. However, there were certain areas where we felt that there could be issues, which could be a matter of concern. These mostly related to the real estate exposures and the capital market exposures.  What happens in the financial system is that risk tends to gravitate to where there is least regulation. This has been one great lessons of the global crisis. In our system, there were certain areas where it could happen. NBFCs, which were leveraging public funds, were actually into more risky areas. While many of these areas require that kind of financing, we also felt that it required buffers in the form of both capital and liquidity.  You must remember one thing, which comes out strongly in this report, that in the case of the banks and the banks’ subsidiaries, there are sectoral caps. There are sectoral caps for capital market exposure. There sectoral caps for real estate exposure.  But for standalone NBFCs, there are no such caps. You can put in caps, which may not be such a good idea as these are NBFCs specialising in a particular sector. Therefore, what we have put the additional risk-weights.

Watch the video............

‘A good balancing act'

The RBI's proposed revised guidelines for licensing of new private banks balances well the necessity of opening up the sector and having more banks with prudential regulation to ensure that there is little room for concentration, said Mr D.R. Dogra, Managing Director and Chief Executive Officer, Credit Analysis and Research Ltd. This will give scope to NBFCs to make inroads into the banking segment; they have a strong presence in some non-metro centres where banking is required. However, it should be recognised that for the enterprises to be commercially viable these banks should not be repressed with financial inclusion conditions especially if there are new entities that are coming into this field, he said.  Maybe the priority sector norms should be placed in a phased manner, or else new entities will find it difficult to carve a niche for themselves in a very competitive set-up, Mr Dogra said.

HBL

‘A positive step'

T. T. Srinivasaraghavan, Managing Director of Sundaram Finance, termed the Usha Thorat report “very positive for the NBFC sector”. The report, he felt, recognised the role played by the NBFC sector in last mile credit delivery. “This is very heartening and a significant endorsement by the regulator of the role played by NBFCs in the much talked about financial inclusion,” he said. “Two things clearly stand out. The tax treatment in respect of income-tax deduction for provisions made under the regulations is something we have been asking for many years now. The benefit that is likely to accrue to NBFCs under the SARFAESI Act is also a positive step for the NBFCs,” he said. “We believe that the message that the regulator is looking to send out through this report is to have a greater convergence between the regulation of banks and non-banks. There seems to be a road map for this convergence,” he added. The report, however, did not address the long-standing plea of NBFCs for differential risk weights for different classes of assets financed by NBFCs. While the risk weights for NBFCs with capital market and commercial real estate exposures had been raised, the report had not touched upon the NBFC sector's plea for preferential risk weights for the lower risk assets financed by them, he said. “Asset financing NBFCs have consistently demonstrated their ability to manage retail portfolios with low levels of credit losses and it is only fair that this be duly recognised by the Reserve Bank of India. We will continue our plea with the regulator to consider assigning differential risk weights for different classes of assets, based on their risk categorisation,” he added.

HBL

RBI panel calls for closer monitoring of NBFCs

...Besides prescribing threshold limits, the Working Group headed by former RBI Deputy Governor Usha Thorat suggested that NBFCs should be subjected to the same regulations as banks with regard to provisioning norms and lending to stockbrokers and merchant bankers.....

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Two steps forward, one step back

Imagine an India where every resident, irrespective of location, is able to make financial transactions electronically with anybody, individuals or firms, anywhere in the country. This is the vision spelt out by the Reserve Bank of India in its ‘Operational Guidelines - Implementation of Electronic Benefit Transfer (EBT) and its convergence with Financial Inclusion Plan (FIP)', issued on August 12........

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RBI unveils new banking draft norms

Mumbai: Broking houses and realty firms are proposed to be made ineligible for new licences to operate commercial banks in the norms drafted by the country's central bank, which wants aspirants to be Indian entities with a sound track record of 10 years. "The aggregate non-resident shareholding in the new bank shall not exceed 49 percent for the first five years, after which it will be as per the extant policy," say the draft norms issued Monday by the Reserve Bank of India (RBI) for comments. "Entities in the private sector owned and controlled by residents with diversified ownership, sound credentials and integrity and having successful track record of at least 10 years will be eligible to promote banks," it says.  Entities that earn 10 percent or more from realty, construction or broking activities, either individually or taken together in the past three years will not be eligible for such licences, the apex bank has proposed. The central bank, which has called for comments from all interested parties before Oct 31, also says that certain additional requirements may be stipulated in case of companies that earn 40 percent or more from non-financial business. Finance Minister Pranab Mukherjee had announced last year in his budget speech that it was the government's intent to open up the banking sector further. The Reserve Bank, on its part, had also launched a discussion paper on the subject. Among the companies and industrial houses hoping to apply for banking licences include the Tatas, the Aditya Birla Group, Anil Ambani-led Reliance Group, Bajaj Financial Services and Shriram Finance. The central bank said final guidelines will be issued and the process for licences will be started after receiving feedback on the draft guidelines as also after certain vital amendments to Banking Regulation Act, 1949. The other highlights of the draft norms include a minimum capital of Rs.500 crore. This apart, a wholly owned non-operative holding company also has to be set up to oversee both the banking and other financial companies wihin the promoter group. This holding company will have to be registered with the Reserve Bank of India as a non-banking finance company and will need to keep at least 50 percent independent directors on its board. The draft guidelines also propose that existing non-banking finance firms, if considered eligible, could either promote a new bank or convert themselves into banks. The new entrants must have a viable business model, outling their financial inclusion plan.

The other highlights of the draft include:

- At least 25 percent of branches in unbanked rural centres

- Exposure to promoters not to exceed 10 percent of the paid-up capital and reserves of the bank

- Aggregate exposure to all promoter group entities not to exceed 20 percent

- Bank should get its shares listed on stock exchanges within two years

Zee News

Corporates welcome RBI's draft norms on banking licences

Welcoming the Reserve Bank of India's (RBI) draft guidelines on granting new bank licences, corporates and analysts today said the norms would pave the way for entry of business houses into the banking space. "We welcome the draft banking guidelines. Clearly, based on eligibility criteria, Aditya Birla Nuvo, which enjoys a significant presence across several key financial services businesses, would fit into the criteria," Aditya Birla Nuvo Chief Financial Officer Sushil Agarwal said. Terming the paper as a well-thought out piece, analysts said the draft incorporates a lot from the consultative process held after the the discussion paper floated by the RBI in August, 2010. "Overall, this is a good set of guidelines. They give a clear set of directions about the entry of corporates which is welcome," consultancy firm Ernst and Young's Director Viren Mehta said. "The draft guidelines are definitely in line with the discussion paper and views expressed subsequently also have been taken into consideration," GS Sundararajan, managing director of finance company Shriram Capital, said. He said the group will be analysing the details and looking if it can come up with a profitable model. The company's interest in banking continues, Sundararajan added. "The draft guidelines contain a strong focus on greater financial inclusion, efficient corporate governance, adequate controls on exposure to group companies, and time-bound milestones for listing. We now look forward to the release of the final guidelines over the next few months," Sam Ghosh, CEO, Reliance Capital, said. "Our group will be keen to explore a banking licence. Our long experience of two decades provides us with the necessary understanding and strength in the financial services domain," diversified conglomerate Mahindra and Mahindra's President (Finance, Legal and Financial Services) Uday Phadke said. "What is important is that they have chosen to create a level-playing field, there is nothing there which will offend an existing player," consultancy firm PricewaterhouseCoopers' Associate Director Robin Roy said. Roy said keeping the sector's volatility in mind, the Reserve Bank has taken a view of going slow on granting licences to broking houses and realty companies. He, however, said that things like two-year compulsory listing clause can be an uphill task for aspirants, a view endorsed by E&Y's Mehta as well. "Listing in two years may be a challenge but I feel it can be easily done in a four-year window," Mehta said. Meanwhile, the Religare Group expressed its keenness to enter the banking arena. "Religare's interest in banking services... On a summary review of the draft guidelines, we believe that the Religare group qualifies for all criteria set out for applying for a new banking licence," the group said in a statement. Industry chamber Assocham expressed reservations about the minimum 12% capital adequacy requirement for a bank in its first three years of operations. "It will create an uneven level-playing field as this will increase the cost of funds, and thus cost of lending," its Secretary General DR Rawat said in a statement.

BS

RBI guidelines for NBFC: A lot depends on implementation, says Magma Fincorp CFO

Mumbai : Reacting to the RBI Working Group’s recommendations for non-banking financial companies, Mr V. Lakshmi Narasimhan, CFO, Magma Fincorp, has said: “The RBI’s guidelines for NBFCs are quite balanced, provided they get implemented.  “I say that because there a couple of recommendations that transcend RBI’s purview. For instance, the guidelines say that asset classification and provisioning norms similar to banks to be brought in phased manner for NBFCs. Suitable income-tax deduction akin to banks may be allowed for provisions made under the regulations. As of now tax benefit is available for NBFCs only for write-offs, while banks get tax benefit for provisions. But how can the RBI change tax provisions? “Similarly, the guidelines say NBFCs may be given the benefit under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. While that is a good thing, I don’t know if it falls within RBI’s purview. The guideline says that the Tier-I capital for Capital to Risk Weighted Assets Ratio (CRAR) purposes may be specified at 12 per cent to be achieved in three years for all registered deposit taking and non-deposit taking NBFCs. But with banks sitting on 4.5 per cent Tier I, this does not remove the arbitrage between banks and NBFCs. This is a regressive step for NBFCs. The RBI has also has not looked at issues such as priority sector lending and external commercial borrowings, which are very critical for NBFCs.

HBL

Inflation beyond control of monetary policy

...This is not to argue that economic growth is the only priority and inflation does not matter, but it is simply unacceptable that economic growth is hurt while inflation remains unchecked.....

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Review of assets

This refers to the article “Right time for RBI to sell gold” (Business Line, August 24). As stated, gold forms only 7.5 per cent of the RBI's forex reserve holdings in value terms. Hence, it may not be prudent at this stage to sell gold and book profits. As for the extra cover the sale will provide to fiscal deficit, there are several other methods to manage government finances, provided there is political will. As there is volatility in the value of various components of forex reserves and considering the responsibility the RBI is holding, which isn't comparable with other central banks, even if profits are booked by sale of gold, they should be used only to augment the RBI's reserves, which aren't growing with the size of the balance- sheet. There cannot be two views on the need for a re-look at the current gold holdings to make them tradable and productive. During 2009-10, the RBI purchased nearly 200 tonnes of gold from IMF. Even with this addition, the RBI accounts for less than three per cent of the gross gold-holdings of all central banks.  Viewed from a commercial angle, IMF chose to sell gold when it felt that prices had peaked. The RBI would have, in fact, gained approximately Rs 10,000 crore, if the purchase was made a year earlier.  At this stage, looking at the way in which the dollar and other currencies are behaving, there is a case for the RBI to augment its gold portfolio under forex reserves.  The money value, size of the RBI's balance- sheet and the strength of major currencies have undergone change in the past 55 years, following incorporation of the requirement in the RBI Act that ‘the aggregate value of gold should not be less than Rs115 crore'. Hence it is time for a review of the composition of the assets held.

M. G. Warrier, Mumbai (BS)

Who will finance growth?

Government officials who’ve once again begun talking of a 9% growth, for the next Plan period, would do well to take a look at RBI’s latest Annual Report where it details the dramatic fall in the financial savings rates of Indian households...........

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New norms to float private banks: Sound credentials, integrity & successful track record

New banks will be allowed to set up only through a wholly owned Non-Operative Holding Company (NOHC) to be registered with the RBI as a non-banking finance company, said the draft guidelines posted on RBI website titled “Licensing of New Banks in the Private Sector.”  The draft said NOHC should hold minimum 40 per cent of the paid-up capital of the bank for a period of five years from the date of licensing of the bank. Shareholding by NOHC in excess of 40 per cent should be brought down to 20 per cent within 10 years and to 15 per cent within 12 years from the date of licensing of the bank.

On expected lines

“After a lot of discussion, the RBI has set out the norms which are certainly positive, said Vijaya Bank Chairman and Managing Director H S Upendra Kamath while commenting on the RBI norms. “To make sure that only serious players apply for banking licence the minimum capital requirement has been kept at Rs 500 crore. The stipulation that promoters will have hold at least 40 per cent of the equity for five years will also bring in only the committed players.”  The RBI also said that foreign shareholding (or the aggregate non-resident shareholding) in the new bank shall not exceed 49 per cent for the first 5 years after which it will be as per the extant policy.  It is a common knowledge that many of the business groups like Tatas, Anil Ambani-led Reliance, Aditya Birla Group and Chennai-based Shriram Group and Development Bank of Singapore (DBS) have evinced their interest to make a foray into the banking sector and they were waiting for RBI to announce the new guidelines to make a further move. In this context, DBS CEO Piyush Gupta had stated: “If those guidelines come through, then we will get the opportunity to start branching out in India exactly like any of the national banks....then yes we will go back and reconsider the scale and size of the footprint that we would wish to create.”  Among other things, RBI said the business model of a new bank should be realistic and viable and it should address how the bank proposes to achieve financial inclusion. In terms of corporate governance, at least 50 per cent of the directors of the NOHC should be independent directors. The corporate structure should be such that it does not impede effective supervision of the bank and the NOHC on a consolidated basis by the Reserve Bank.

Only serious players

Eligible promoters (entities or groups) in the private sector should have sound credentials and integrity should be having successful track record of at least 10 years to promote banks. RBI also made it clear that realty companies and broking firms will not be allowed to float new banks. It said, “entities or groups having significant (10 per cent or more) income or assets or both from real estate construction or broking activities or both, individually or taken together in the last three years will not be eligible.” While seeking comments from banks, NBFCs, industrial houses, other institutions and the public at large, RBI said the final guidelines will be issued and the process of inviting applications for setting up of new banks in the private sector will be initiated only after receiving feedback, comments and suggestions on the draft guidelines. To make sure a bank does not exessively fund its promoters’ business, the RBI said the exposure of bank to the promoter group shall not exceed 10 per cent and total aggregate exposure to all the entities in the group shall not exceed 20 per cent of the paid-up capital and reserves of the bank. The bank should get its shares listed on the stock exchanges within two years of licensing. New banks should open at least 25 per cent of its branches in unbanked rural centres (population upto 9,999 as per 2001 census), while existing NBFCs, if considered eligible, may be permitted to either promote a new bank or convert themselves into banks.

DH

Financial inclusion mandatory for new banks, says RBI

Industrial houses and companies seeking banking licences will have their work cut out, as the Reserve Bank of India (RBI) has mandated new banks to open a fourth of their branches in unbanked rural centres. While a recent circular issued by the central bank directed existing banks to open 25 per cent of their new branches in rural areas, industry analysts said the task would be more challenging for the new entrants and the time taken for them to turn profitable may be extended. “Generating business from branches in unbanked areas may be a challenge for new banks. They would have to work out cost-effective ways to open branches in rural areas,” said a senior official of a large Mumbai-based public sector bank. The new banks may opt to offer basic banking services in rural areas, at least in the initial period, to keep their costs low, even as they have to provide full-banking services in metros and urban centres because of competition, he said. In its draft guidelines on new bank licensing, RBI said business models for new banks must include their financial inclusion plans. The models should be “realistic and viable” and any deviation from the stated plan after securing the licence would attract penalties like restriction in the banks’ expansion programmes or a change in management. According to the draft norms, new banks would have to open 25 per cent of their branches in unbanked areas with a population of up to 9,999, according to the 2001 census. This would avoid over-concentration of their branches in cities, which already have adequate banking presence. “The proposal to set up 25 per cent of branches in rural centres appears challenging. But if we look at other emerging markets and African countries, this model has been implemented through product innovation and the use of technology. So, even if it looks difficult, it is not impossible. If it is done properly, it would supplement the balance sheet strength of new banks,” said Viren H Mehta, director, Ernst & Young. The new banks have to invest in ensuring connectivity between the urban and rural branches, since they have to operate on the core banking solution (CBS) platform from the beginning. Bankers said existing lenders currently use CBS or VSAT in areas where there are connectivity concerns. RBI also said the new banks should comply with priority sector lending targets and sub-targets that are applicable to existing domestic banks.

BS

RBI panel proposes tough regulatory norms for NBFCs

MUMBAI: A Reserve Bank of India panel has advocated tough new norms for non-banking financial companies (NBFCs) with the aim of strengthening the regulatory and supervisory framework for such lenders.  Besides prescribing threshold limits, the Working Group headed by former RBI Deputy Governor Usha Thorat suggested that NBFCs should be subjected to the same regulations as banks with regard to provisioning norms and lending to stock brokers and merchant bankers.  "Accounting norms applicable to banks may be applied to NBFCs," it added.  The Working Group further said that all NBFCs with assets of over Rs 1,000 crore, whether listed or unlisted, should be made to comply with Clause 49 of SEBI's listing agreement, which pertains to the composition of a company's board of directors.  It also called for annual stress tests and inspection of such NBFCs to ascertain their vulnerability.  The panel also suggested that NBFCs should have a minimum 12 per cent Tier-I capital adequacy ratio -- which is the ratio of the bank's core capital to its risk -- within three years of registration.  It also recommended assigning a higher risk weight to the capital market and commercial real estate exposure of NBFCs that are not sponsored by a bank or do not have any bank as part of their group. The RBI panel suggested the imposition of a risk weight of 150 per cent for capital market loans and 125 per cent for commercial real estate loans by such NBFCs. It also advocated giving NBFCs benefits under the Securities and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. 

TOI

RBI panel recommends higher capital norms, risk weights for NBFCs

Mumbai : An RBI working group has recommended higher capital norms for non-banking financial companies (NBFCs), increased risk weights for NBFC lending to commercial real estate and capital markets sectors. The group has also recommended that accounting norms and provisions that are currently applicable to banks be applied to NBFCs also in a phased manner. The Reserve Bank of India working group on NBFC sector issues and concerns, headed by Ms Usha Thorat, former Deputy Governor, RBI and current Director, Centre for Advanced Financial Research and Learning (CAFRAL), released its report this morning. The group was set up for reviewing all regulations relating to the NBFC sector in the light of concerns about NBFCs exploiting gaps in regulation to carry on their business which was similar to banking business.  The fast growth in the NBFC sector, leveraging on public funds (deposits) has been a source of regulatory concern. The main theme of this report seems to be to bring NBFC regulations more in alignment with the rules that govern banks. The group has, therefore, recommended that a number of regulations that currently apply to banks be applied to NBFCs also.

The key recommendations of the group are:

1. The RBI retains the minimum net owned fund (NOF) requirement for all new NBFCs wanting to register with the Reserve Bank at the present Rs 2 crore till the Reserve Bank of India Act is amended. The RBI should, however, insist on a minimum asset size of more than Rs 50 crore for registering any new NBFC. Existing NBFCs below this limit may deregister or be asked to seek a fresh certificate of registration at the end of two years.

2. NBFCs not accessing public funds may be exempted from registration provided their assets are below Rs 1,000 crore

3. Any transfer of shareholding, direct or indirect, of 25 per cent and above, change in control, merger or acquisition of any registered NBFC should have prior approval of the RBI.

4. The twin-criterion of assets and income for determining the principal business of an NBFC should be increased to 75 per cent of the total asset and 75 per cent of the total income, respectively. A time period of three years may be given to fulfil revised principal business criteria.

5. Tier I capital for Capital to Risk Weighted Assets Ratio (CRAR) purposes may be specified at 12 per cent to be achieved in three years for all registered deposit taking and non-deposit taking NBFCs.

6. Liquidity ratio may be introduced for all registered NBFCs such that cash, bank balances and holdings of government securities fully cover the gaps, if any, between cumulative outflows and cumulative inflows for the first 30 days.

7. Asset classification and provisioning norms similar to banks to be brought in phased manner for NBFCs. Suitable income-tax deduction akin to banks may be allowed for provisions made under the regulations. Accounting norms applicable to banks may be applied to NBFCs.

8. NBFCs may be subject to regulations similar to banks while lending to stock brokers and merchant banks and similar to stock brokers, as specified by the Securities and Exchange Board of India (SEBI), while undertaking margin financing.

9. Financial conglomerate approach may be adopted for supervision of larger NBFCs that have stock brokers and merchant bankers in the group.

10. Government owned entities that qualify as NBFCs may comply with the regulatory framework applicable to NBFCs at the earliest.

11. NBFCs may be given the benefit under SARFAESI Act, 2002.

HBL

Corporate aspirants await clarity

There is uncertainty over RBI’s interpretation of ownership. It has stated a defined timeline on the shareholding structure of the NHOC: Holding more than 40 per cent has to be brought down in two years, and again, systematically brought down to 15 per cent over a 12-year period. However, RBI has also said promoters and promoter groups with diversified ownership and 10 years of track record would be eligible. The definition of diversified ownership is not clear. Most big Indian corporates do not have varied stakeholders and most business families are classified as single units. But many corporates felt groups with listed entities would not face difficulties, as they had many shareholders.

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Let a dozen banks bloom

How many banks will India need? The draft proposal does not give any indication of that. Since about half of India’s population does not have access to banking, by simple arithmetic we need to double the number of banks. If that sounds audacious, there should be at least a dozen new banks of different shapes, sizes and business plans. By keeping the entry-level capital requirement at a “minimum” Rs. 500 crore, RBI has created the environment. Even if a few of them die a premature death, RBI should not feel inhibited to experiment if it’s serious about financial inclusion.

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RBI steps for financial inclusion: ASSOCHAM

It is good that entities in the private sector owned and controlled by residents with diversified ownership, sound credentials and integrity and having successful track record of at least 10 years will be eligible to promote banks, said The Associated Chambers of Commerce and Industry of India (ASSOCHAM).

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More jewellers turn to save-for-gold scheme

Even as gold prices are hitting newer heights with every passing day, jewellers are increasingly turning towards newer schemes to make it convenient for their customers to buy yellow metal even at peak prices. According to senior official from World Gold Council, local jewellers are playing a vital role in encouraging consumers to buy gold even at the prevailing high prices. Many jewellers from different parts of the country are seen offering 'save-for-gold' schemes, which gives convenience to the consumers to purchase gold or gold jewellery by saving a small amount every month with the selected jeweller. "There is an increasing trend of jewellers offering such schemes to the customers. We did a survey of top cities in the country including Ahmedabad and Surat in Gujarat, and what we found was a large number of jewellers are offering save-for-gold schemes for consumers," said Ajay Mitra, managing director (India, Middle East), World Gold Council. As per the statistics provided by Mitra, as many as 75 per cent of the total jewellers in Surat are offering such schemes, while in Ahmedabad, the number is slightly less at 64 per cent. He further mentioned that in cities like Chennai, Madurai and Nagpur 100 per cent jewellers offered such schemes. In Bangalore 94 per cent jewellers offered saving schemes, while in Mumbai 77 per cent jewellers practiced this method to attract buyers even at the high gold prices. "Saving-for-gold schemes are good for retail jewellery buyers, who would not afford to make huge one-time investment for buying gold jewellery. This method encourages them to start planning in advance for their gold purchases especially for marriage buying. We see good response to this scheme," said Manoj Soni, director, AB Jewels - an Ahmedabad-based jeweller. Jewellers offer 11-15 months of saving cycle with fixed amount to be deposited with the respective jeweller every month. This becomes convenient for the small consumers, who would deposit smaller amount ranging from Rs 500 to Rs 5000 every month. Considering the rising engagement of jewellers in the financial transactions, the Reserve Bank of India (RBI) is also believed to be considering bringing jewellers under its regulatory gamut. "It is because of some isolated incidences of jewellers disappearing after taking money from depositors, the RBI is now considering to bring some regulation for such jewellers who are engaged in non-banking financial activities," Mitra informed. In the wake of rising fraud cases for quality of gold, the union ministry of consumer affairs would make hallmarking compulsory for all the jewellers across the country. "The ministry will make hallmarking of gold compulsory from January 2012 for all the jewellers in India," said Mitra. Gold prices have seen incessant increase since 2003 from US $ 352 per ounce (average price for Q1 2003) to US $ 1506.1 per ounce (avg price for Q2 2011). Hence, the convenience of saving with jewellers and get pricey jewellery without feeling the heat of fiery gold prices is attracting more buyers even at peaking prices of the precious metal.

BS

US Fed, IMF sound warning bells

..... It was almost as though he was echoing the RBI governor, Dr D. Subbarao, telling the Indian government about its fiscal responsibilities of managing supply-side constraints to complement the monetary policies and control inflation. But while the fallout of India’s problems are restricted to India, the problems in the US and Europe, if not resolved with seriousness, also jeopardise other trade and financial markets......

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