A sealed lock as CBI team seals Punjab National Bank’s South Mumbai branch at Brady House in Mumbai on Monday. The PNB fraud case involving jeweller Nirav Modi was allegedly carried out of this branch. (Source: PTI)

Nearly 400 NBFCs Shut Shop As RBI Clean-Up Continues  

The RBI is weeding out small non-banking financial companies that have been unable to meet capital requirements, in a bid to clean-up the sector. The regulator has been tightening norms for NBFCs in stages since 2014 and the surge in cancellation of licences is a part of that.

The central bank has cancelled 392 licenses since the beginning of this fiscal year till the end of August, shows data compiled by BloombergQuint based on periodic updates from the regulator. Most of these cancellations have taken place in the last two months. To be sure, the number of cancellations is a fraction of 11,402 NBFCs that were registered with the RBI as of March 2018.

In addition, 79 NBFCs have surrendered licenses of their own accord, with a fourth of them having done so in the past two months.

The number of license cancellations is expected to remain high over the coming months, said Raman Aggarwal, Chairman of the Finance Industry Development Council, a self regulatory body for NBFCs. He explained that most of the cancellations are due to a failure on part of these companies to meet the minimum ‘net owned funds’ threshold of Rs 2 crore. That requirement kicked-in starting March 2017. However, the RBI is enforcing it now, perhaps after giving the firms a grace period of a year.

Tightening Of NBFC Regulations

The last time the sector saw a cleanup of this scale was in 1997 when amendments in the RBI Act of 1934 provided for compulsory registration of all NBFCs and minimum net owned funds of Rs 25 lakh. Aggarwal estimates that more than one-fourth of the estimated 40,000 NBFCs that were in existence back then, were forced to shut down.

Since then the RBI has been tightening rules for NBFCs in stages.

In a November 10, 2014 circular, NBFCs were asked to raise the level of net owned funds, hold more capital and raise provisioning.

  • The minimum level of net owned funds was pegged at Rs 1 crore by March 2016 and Rs 2 crore by March 2017.
  • Tier-1 capital had to be raised to 8.5 percent by March 2016 and 10 percent by March 2018.
  • Asset classification norms were to be brought in line with the 90-day NPA (non performing assets) recognition policy followed by banks by March 2018.

The licence cancellations being seen now are a consequence of that circular.

NBFCs being unable to raise even Rs 2 crore raises a legitimate question about their feasibility and viability, said Arun Singh, lead economist at Dun & Bradstreet, while explaining the rationale behind the clean up.

NBFCs deal with financing requirements, which is at the heart of an economy. If they are unhealthy and collapse, they will send ripples through other parts of the economy.
Arun Singh, Lead Economist, Dun & Bradstreet

Health-Check of NBFC Sector

Certain parts of the NBFC sector, particularly those in the business of consumer finance, have grown faster than their banking peers in the last few years. That has raised concerns about a potential build-up of asset quality concerns.

Data provided by the RBI, however, shows that at an aggregate level, the NBFC segment remains healthy.

According to the June edition of the RBI’s Financial Stability Report, the aggregate balance sheet size of the NBFC sector stood at Rs 22 lakh crore as on March 2018. Loans and advances rose 21 percent in 2017-18, after a 14.6 percent increase in the previous year.

The gross NPA ratio fell to 5.8 percent at the end of March 2018, compared to 6.1 percent a year ago.