Et Cetera...

1. The RBI has issued a clarification regarding Core Investment Companies (CICs) issuing guarantees. As per the said clarification, before issuing guarantees or taking on other contingent liabilities for group entities, CICs must ensure that they can meet the obligations thereunder, as and when they arise. CICs which are exempt from registration requirements must be in a position to honour the obligation/s without recourse to public funds. If unregistered CICs with asset size above Rs. 100 crores access public funds without obtaining a certificate of registration from RBI, they will be seen as violating Core Investment Companies (Reserve Bank) Directions 2011 dated January 5, 2011.

2. As per a news article, the RBI has ruled out equal treatment for NBFCs and banks which are engaged in providing gold loans. It has declined to raise a cap of 60% of the value of ornaments that gold loan companies are allowed to lend to customers or bring commercial banks under the ambit of the ceiling, thus maintaining the edge of banks, which can lend more for the same pledged worth.

3. Per news reports, the Government of Karnataka is prosecuting NBFCs which are charging excessive interest on loans granted.

4. The Bombay High Court has admitted a petition filed by a NBFC, M/s. Alternative Investment and Credits Limited (AICL) against a RBI order canceling its certificate of registration. The single judge however left the maintainability issue open. As per news reports, AICL is 10 year old NBFC functioning as per the principles of Islamic finance, i.e. a non-interest bearing participatory finance model.

The call for contributors remains open. Comments/ suggestions/ criticism of all nature welcomed.

Miscellaneous

1. In an interesting article in the Mint, Suresh Gurumani has argued that private sector MFIs have demonstrated a scalable model that can also benefit the rural youth by providing gainful employment. He suggests that it is time for the government and the banks to step forward to use this model to further the objectives of financial inclusion.

2. The State of Bihar plans to set up two special courts to dispose of cases relating to defrauding of small investors by NBFCs.

3. The industry has differing views on the impact of the change in RBI regulations on NBFCs specializing in gold-loans - read here and here.

Finally, I am putting out a call for contributors to this blog. Anyone interested in contributing posts in the form of notes/ articles/ teasers in relation to the legal/ regulatory environment impacting NBFCs on a regular/ occasional basis, please drop me an mail - satyajit(dot)gupta(at)gmail(dot)com. Further details can be obtained through email.

RBI Policy 2012 - 2013

The RBI unveiled its Monetary Policy Statement 2012 - 2013 on April 17, 2012. A few relevant proposals from the NBFC perspective are:

1. The Reserve Bank had constituted a Working Group (chaired by Mrs. Usha Thorat) to examine a range of emerging issues pertaining to the regulation of the NBFC sector in view of their growing importance and inter-connectedness with other segments of the financial system, which would have a bearing on financial stability. The report was placed on the Reserve Bank’s website in August 2011 for feedback from the public. The Policy Statement states that the RBI proposes to issue the draft guidelines on the regulatory framework for NBFCs by end-June 2012.

2. Core investment companies (CICs) have, as their primary activity, investment in equity shares of group entities for the sake of holding stake in these companies. As a holding company, a CIC may also need to invest in both financial and non-financial entities overseas. Accordingly, the RBI proposes to place the draft guidelines on overseas investment by CICs on the RBI website for public comments by end-April 2012.

3. The rapid expansion of NBFCs lending against gold has led to their increased dependence on public funds, including bank finance. To supplement the prudential measures already implemented for such NBFCs, the RBI has proposed that:

(a) banks should reduce their regulatory exposure ceiling in a single NBFC, having gold loans to the extent of 50 per cent or more of its total financial assets, from the existing 10 per cent to 7.5 per cent of bank’s capital funds. However, exposure ceiling may go up by 5 per cent, i.e., up to 12.5 per cent of bank’s capital funds if the additional exposure is on account of funds on-lent by NBFCs to the infrastructure sector; and

(b) banks should have an internal sub-limit on their aggregate exposure to all such NBFCs, having gold loans to the extent of 50 per cent or more of their total financial assets, taken together.

The RBI proposes to issue detailed guidelines in this regard separately. 

4. The RBI has also constituted a Working Group (chaired by Mr. K U B Rao) to study various aspects/ issues emerging from NBFCs lending against gold. 

RBI tightens regulations for 'golden' NBFCs

Jab ghar mein padha hai sona, tab kahein ka rona!

This catchy jingle was the talk of town recently and was part of the ad campaign for one of the NBFCs which lend against gold. With Indians being known to have a good saving habit and gold being a favourite for Indians of all classes, lending against gold has really taken off recently. Keeping in mind the risks to the banking system and retail investors, the Reserve Bank of India has tightened regulations pertaining to NBFCs which lend against gold by amending the rules for such NBFCs.

By way of amending notifications, the banking regulator has directed that the prudential norms applicable to companies having half their assets in gold be amended such that (a) they achieve a Tier-I capital (capital by way of equity or equity-like instruments) of 12% by April 2014, (b) these companies cannot lend more than 60% of the value of gold jewellery, (c) these NBFCs are also expected to disclose the percentage of the loans against the assets held by them, in their balance sheets, and (d) NBFCs are also prohibited from lending against gold coins and/ or bullion.

News reports indicate that the loan to value (LTV) ratios in the sector are currently above 60%. Companies have started recalling loans to adhere to the LTV ratio. CRISIL, which monitors most of the companies in the sector, believes that the RBI guidelines will have an overall positive impact on the sector over the long term as these will reduce regulatory uncertainties that the sector has witnessed in the recent past and enhance stakeholders’ confidence. The LTV cap is likely to result in significantly lower growth rates as borrowers will have to bring in additional jewellery to get the same same loan amount. In addition, this development could result in business volumes shifting to the unorganized sector, which will continue to extend loans at higher LTV ratios. The currently high profitability of gold loan companies may also moderate as these companies are likely to reduce pricing to protect their market share and prevent a shift to the unorganized segment.