RBI sets eyes on NBFCs

Jul 09 2013, 16:11 IST
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SummaryRegulator curbs bond issuance by NBFC; Sector growing faster than banking

The Reserve Bank of India (RBI) has tabled reforms to the funding practices of NBFCs (non-bank lenders) in a move that some observers believe underlines its determination to limit the growth of a shadow-banking system.

Lending by non-banking financial companies (NBFCs) has grown at an annual rate of around 28% over the last decade, while the banking sector's assets have been expanding at about 17% a year since 2010.

That expansion, and how it is funded, seems to be causing concern, and in recent weeks the central bank has announced changes to how these companies can raise money by issuing bonds.

The Reserve Bank of India on June 27 said it would introduce a "minimum set of guidelines" for all private placements from financial companies, previously a popular source of funding for the sector.

Among other restrictions, the notice limits how many times a year these companies can issue privately placed bonds, and caps the number of investors in private placements to 49.

Financial companies rely heavily on the institutional market to fund their loans, since most are not allowed to accept retail deposits. That means any action to restrict their access to the debt markets could have a big impact on the sector's expansion.

The backlash to the proposed rule change triggered an unusual climb-down, and the RBI withdrew the restriction on the frequency of private placements in a July 2 notice, promising a revision "in due course".

Some local market participants, however, see the RBI's recent interest in this alternative financial system as part of an ongoing effort to clean up the country's financial sector and prevent the growth of a less-regulated shadow banking system. That fits with recent regulatory actions against financial companies such as Sahara India.

"It could be the case that the RBI has concerns about fundraising by NBFCs from the public at large under the private placement route, and the case of Sahara India as well as the chit fund cases in West Bengal are likely to have contributed to the RBI initiating these changes" said Rahul Gulati, counsel at Talwar Thakore & Associates, a legal firm.

Conglomerate Sahara India has been at odds with local regulators since 2009 for selling convertible debt that found its way into the hands of high-net-worth individuals without first obtaining the approval of the securities board.

Sahara took the case to the Supreme Court, arguing it had not needed the approval because the deals were private placements, but

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