The Hindu Business Line : Policing NBFCs

THE RESERVE BANK of India's proposal to non-banking finance companies (NBFCs) that they come up with an action plan to liquidate voluntarily their public deposits may have little immediate implications to either the conduct of monetary policy or the business prospects of these entities, although the proposal itself has been made in the context of the RBI's mid-term review of its annual policy statement. For one, while the RBI has spoken of its intention to hold discussions with NBFCs, there is no mention of any time-frame in which these are to be held. In any case, the entire exercise is supposed to be `voluntary', with all its implications on the time required to arrive at a consensus and the roadmap to be followed for such an outcome.

It seems paradoxical that the regulator, whose business it is to keep the activities of those subject to its oversight in line, should seek the NBFCs' indulgence in saving it the burden of regulation. It is by no means clear why these NBFCs should subject their operations to the risk of serious disruption merely to oblige the RBI, if there is a role for public deposits in their scheme of things. Viewed from another angle, the RBI's preference in the instant case for regulatory forbearance makes little sense. Now, such of those of NBFCs whose financial situation is strong enough to enable them to do away with public deposits as a source of finance, and which may do so in response to the central bank's suggestion, might actually end up depriving the depositors of a reasonably secure avenue for their investible surpluses. On the other hand, entities whose operations are so fragile that they cannot afford to dispense with funds from the public have no reason to pay heed to the RBI's suggestion for self-denial. As such, their continued access to the deposit market is not in public interest at all.

The RBI cannot be unaware of these policy implications. Its concern stems primarily from the operations of a handful of what are categorised by it as `residuary non-banking companies'. These entities' reliance on public deposits has been growing even as the quantum of deposits outstanding in the more conventional NBFCs has been declining. Also, a handful of them account for a substantial chunk of public deposits. There has for long been a perception that the affairs of these institutions are not managed in the best interests of depositors. The fact that the RBI data on operations of NBFCs exclude these institutions on certain key parameters only reinforces this suspicion. In the event, the central bank's suggestion permits of only one conclusion: It is merely a nuanced approach to what it sees as undesirable features of deposit-taking activity on the part of some NBFCs. In its own way, it is hinting that it would not hesitate to take the extreme step of banning altogether the acceptance of deposits from the public if these entities do not show signs of mending their errant behaviour. That would be unfortunate as it amounts to penalising the whole community of NBFCs for the bad behaviour of a few that it is unable to effectively police.