Report of the Usha Thorat Committee

The Reserve Bank of India (RBI) released the Report of the Working Group on the Issues and Concerns in the NBFC Sector in August 2011. This Working Group, chaired by Mrs. Usha Thorat, former Deputy Governor of the RBI, was constituted to review the existing regulatory and supervisory framework of non-banking finance companies (NBFCs) with special focus on the risks in the sector. The Working Group was also expected to recommend appropriate regulatory and supervisory measures to address these risks. 

The key recommendations of the Working Group were:

1. The minimum net owned fund (NOF) requirement for all new NBFCs wanting to register with the Reserve Bank could be retained at the present Rs. 2 crores till the Reserve Bank of India Act is amended. The RBI should, however, insist on a minimum asset size of more than Rs. 50 crores 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. 1000 crores.

3. Any transfer of shareholding, direct or indirect, of 25% and above, change in control, merger or acquisition of any registered NBFC should have prior approval of the RBI. [Currently, only change in control of deposit accepting NBFCs require 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% of the total asset and 75% of the total income, respectively. A time period of three years may be given to fulfill revised principal business criteria.

5. Tier I capital for Capital to Risk Weighted Assets Ratio (CRAR) purposes may be specified at 12% 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. Board approved limits for bank’s exposure to real estate may be made applicable for the bank group as a whole, where there is an NBFC in the group. The risk weights for NBFCs that are not sponsored by banks or that do not have any bank as part of the group may be raised to 150% for capital market exposures and 125% for commercial real estate exposures. In case  of bank sponsored NBFCs, the risk weights for capital market exposures and commercial real estate may be the same as specified for banks.

12. NBFCs may be given the benefits under SARFAESI Act, 2002. [Currently, the benefits, e.g. enforcement of security interests utilizing the favourable provisions of the SARFAESI Act, are restricted to banks and certain financial institutions.]

13. Captive NBFCs, the business models of which focus mainly (90 per cent and above) on financing parent company’s products, may maintain Tier I capital at 12% from the time of registration. Supervisory risk assessment of such companies should take into account the risk of the parent company.

14. For the purpose of applicability of registration and supervision, the total assets of all NBFCs in a group should be taken together to determine the cut off limit of Rs. 100 crores.

15. All NBFCs with assets of Rs.1000 crores and above, whether listed or not, should be required to comply with Clause 49 of SEBI Listing Agreements including mandatory disclosures. [This will bring even unlisted NBFCs on par with public listed companies in terms of corporate governance norms, e.g. board independence, audit committee, periodic financial disclosures, etc.]

16. Disclosure for NBFCs with assets over Rs 100 crores may include provision coverage ratio, liquidity ratio, asset liability profile, extent of financing of parent company products, movement of non-performing assets (NPAs), off-balance sheet exposures, structured products and securitizations/ assignments.

17.  NBFCs with assets of Rs. 1000 crores and above should be inspected comprehensively on an annual basis with an annual stress test carried out to ascertain their vulnerability.

Comments had been invited on the report (to be submitted by end September 2011). There has been no further information available on this.