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RNBCs: High time RBI stepped in

P. Devarajan

Though the Report does not name the two majors, many believe the reference is to Peerless General Finance & Investment Company Ltd and Sahara India Financial Corporation Ltd, registered as RNBCs with the RBI.

RESIDUARY Non-Banking Companies (RNBCs) are a queer breed in the Indian financial system with probably scanty RBI supervision.

Financial markets are quite unsure of their financial status. Now an RBI Working group has favoured some restraint on their activities which could form the basis for RBI moving in. RNBC is a sub-category of NBFC.

RNBC is an NBFC accepting deposits, but does not fall within the defined categories of NBFCs such as leasing company, hire purchase company and loan company. RNBCs are classified separately as their business does not conform to that of other NBFCs.

As on March 31, 2003, there were four companies in the field (with two dominating) carrying an aggregate deposit liability of Rs 15,061 crore.

The Report of the Working Group on Development Financial Institutions from the RBI calls for a halt to the unlimited acceptance of deposits by RNBCs and prefers linking deposit growth to Net Owned Funds of the entities.

Though the Report does not name the two majors, many believe the reference is to Peerless General Finance & Investment Company Ltd and Sahara India Financial Corporation Ltd, registered as RNBCs with the RBI.

Incidentally, the list of experts the Working Group consulted includes Mr S.K. Roy, Managing Director, Peerless, and Mr Subrata Roy Sahara of Sahara.

As of March 31, 2003, the aggregate deposits of the two large companies stood at Rs.15,058 crore accounting for 99.98 per cent of deposits with all RNBCs; 7.25 per cent of the public deposits with all the NBFCs; and 1.18 per cent of the aggregate deposits with all scheduled commercial banks.

The Report adds: "It is reported that in the past the operations of these two companies had caused supervisory concerns to the RBI.

While one company had weak financials, the growth in deposits in the other company needed a great deal of RBI's attention to ensure that the company fully complied with the requirements of the investment and the specified patter of asset cover for depositors."

RNBC regulations permit the companies to access borrowings from banks, FIs and corporates, but the four RNBCs have only tapped public deposits. In the large two, around 24.9 per cent of the deposits are daily deposits, 50.9 per cent form other recurring deposits with the balance 24.2 per cent in fixed deposits.

Deposit collection is through agents and in the case of one entity, the agency work is done by a partnership firm operating through its own branches, field staff and agents.

The Report says: "A striking feature of the deposits raised by RNBCs is the leeway given in the regulations to mobilise deposits without any restriction on the quantum of deposits with reference to Net Owned Funds (NOF).

In effect, as long as RNBCs deploy 80 per cent or more of their deposits in mandated securities, they are free to increase their deposits to any level. This is, of course, subject to the continued compliance with the laid down prudential norms, including CRAR."

In talks with the Working Group, the two companies objected to any restrictions on the liabilities side. But the Working Group disagreed on the following counts: a) there has been a steep growth in deposits in the two large RNBCs - a growth of Rs 3,219 crore in the last three years showing a rise of 26 per cent over the March 2001 level of Rs.11,972 crore;

b) the deposits of RNBCs are not rated;

c) the two companies have 5.36 crore deposit accounts. The large volume of deposits has led to chronic problems of accounting for deposit liabilities in one company.

To protect depositors and the financial system, the Report has favoured a cap on deposits at 16 times the NOF. In addition, it argues for RNBCs unwinding public deposits to conform to NBFC norms in general i.e., a ceiling of 4 times or 1.5 times, as applicable.

Presently, the minimum and maximum period for deposits are not less than 12 months and not exceeding 84 months respectively.

The minimum rate of return is 5 per cent per annum (compounded annually) on the deposits accepted in lump sum or at monthly or longer intervals; and 3.5 per cent on daily deposit schemes.

There is no upper limit for RNBCs unlike the 11 per cent for other NBFCs. Perhaps, RNBCs have escaped the rigorous supervision by RBI and by limiting deposit growth, depositors could stand to gain. It's time for the RBI to move.

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