7. Non-Banking Financial Companies |
| 4.46 In recent times, there has been a significant increase in the domain of activities of NBFCs as evidenced by the fact that the share of non-bank deposits (in gross financial assets of household sector) has increased from a low of 2.2 per cent during 1990-91 to 13.6 per cent during 1996-97, declining somewhat in 1997-98. The growth in operations of NBFCs has been duly acknowledged by the recently released Report of the Working Group on Money Supply (Chairman: Dr.Y.V.Reddy), released in June 1998, wherein a new measure of liquidity aggregate has been proposed which seeks to incorporate NBFCs with public deposits of Rs. 20 crore and above (Box IV.1). This is indicative of the fact that non-bank finance companies have been performing an important role in the process of intermediation, especially in areas where established financial entities are not easily accessible to borrowers. |
| |
| BOX IV.1 : A MEASURE OF LIQUIDITY AGGREGATE INCORPORATING NBFC DEPOSITS |
| |
| In recent years, there has been a significant increase in the importance of non-banking financial companies in the process of financial intermediation . Taking into consideration its increasing importance, the Report of the Working Group on Money Supply (Chairman: Dr. Y.V.Reddy) recommended that one of the new measures of liquidity should include information relating to the assets and liabilities of NBFCs. A broad spectrum of liquidity measures, starting from the restrictive reserve money (M0) through broad money (M3), as well as three new measures of liquidity aggregates, Li (i=1,2 and 3) that are issued by all financial intermediaries have been proposed by the Group. |
| |
| Several countries have adopted broad measures of monetary aggregates, taking cognizance of the increasing importance of non-depository institutions in the intermediation process. The U.K., for instance, has a measure, M4, which incorporates the wholesale deposits of banks and building societies. Among others, broad money in Australia is defined as the aggregate of M3 (sum of currency plus demand deposits and time deposits) and net borrowings from non-bank private sector by non-banking financial institutions. The U.S. likewise, has an broad measure of liquidity which incorporates non-bank public holdings of U.S. savings bonds. |
| To incorporate the deposits of NBFCs within the overall ambit of the monetary system, the Group proposed a measure of liquidity aggregate, labeled L3, defined as the aggregate of L2 and public deposits with large-sized (with deposits of Rs. 20 crore and above) non-banking financial companies. The measure has been sought to be compiled on a quarterly basis. The data requirements for this purpose, would include, on the liabilities side, (i) public deposits (short-term and long-term); (ii) borrowings from banks, corporates, foreign governments, authorities, individuals etc.; (iii) resources raised through issue of convertible or secured debentures; (iv) other liabilities (if any). On the assets side, data requirements would consist of (i) investments in government securities and in shares, bonds, debentures, CPs etc., of corporates including PSUs; (ii) loans and advances; (iii) hire purchase, equipment and bills discounting; (iv) overseas lending; and (v) other assets (if any). |
| |
| The incorporation of NBFC deposits into the monetary system, however, raises several regulatory issues. First, the bulk of NBFCs deposits are term-deposits, whereas a certain proportion of bank deposits is in the form of demand deposits. Secondly, a ceiling of 16 per cent per annum has been stipulated on public deposits of NBFCs. The Monetary and Credit Policy of April 1998 permitted banks to offer differential rates on deposits of the same maturity above a threshold limit. Thirdly, bank deposits upto a certain limit are insured. NBFCs, on the other hand, have no such insurance on their deposits. |
| |
| The financial sector reforms have ushered in significant changes in the economy. Newer instruments have found their way in the financial marketplace and several new areas of activities have grown in significance. In the light of these developments, the Working Group has proposed several measures of liquidity aggregates, apart from refining and modifying the ones already extant. These measures would lead to a more comprehensive and effective compilation of the monetary and liquidity aggregates so as to enable monetary and credit measures to play a critical role in improving the allocative efficiency of the system. |
| |
| References |
| |
| Reserve Bank of India (1998) Report of the Working Group on Money Supply: Analytics and Methodology of Compilation (Chairman: Dr. Y.V. Reddy). |
| 4.47 The Reserve Bank has been regulating the Non-Banking Financial Companies (NBFCs) for over three decades since 1963 under the provisions of Chapter IIIB of the RBI Act and the directions issued thereunder. These regulations were confined solely to deposit acceptance activities of NBFCs and did not cover their functional diversity and expanding intermediation. This rendered the existing regulatory framework inadequate to control NBFCs. In this context, the Working Group on Financial Companies (Shah Working Group) which submitted its report in September 1992 recommended certain measures towards an appropriate regulatory framework for NBFCs and for vesting more powers with the Reserve Bank for better and more effective regulation of NBFCs. An important objective of the recent measures has been to better align these entities with the overall financial system, subject to their adherence to the prudential guidelines in place. |
| |
| 4.48 Based on the recommendations of the Working Group on Financial Companies constituted in April 1992 (Shah Committee), a system of registration was introduced in April 1993 for NBFCs with Net Owned Funds (NOF) of Rs.50 lakh and above. Prudential norms pertaining to income recognition, asset classification and provisioning were prescribed in June 1994. The Reserve Bank also constituted an expert group in April 1995 for designing a supervisory framework for the NBFCs (Khanna Committee) to suggest the off-site surveillance and the on-site examination system for the NBFCs based on their asset size and the nature of business conducted by them. |
| |
| 4.49 Although NBFCs registered with the Reserve Bank of India under 1993 scheme were required to adhere to the prudential norms from March 1995, many of these registered companies not only failed to comply with the norms, but also failed to submit the requisite half-yearly returns, thus defeating the very purpose of registration. Moreover, the compliance with these regulations could not be enforced on account of the absence of adequate statutory powers with the Reserve Bank. In order to bridge this regulatory gap and in pursuance of the recommendations of the Shah Working Group, the RBI Act was amended in January 1997 by effecting comprehensive changes in the provisions contained in Chapter III-B and Chapter V of the Act by vesting more powers with the RBI. The amended Act provided, inter alia, for: |
| (i) |
Compulsory Registration of NBFCs and a minimum NOF of Rs.25 lakh as entry point norm; |
| |
|
| (ii) |
Maintenance of liquid assets by NBFCs as a percentage of their deposits in unencumbered approved securities (Government securities/guaranteed bonds); |
| |
|
| (iii) |
Creation of a reserve fund and compulsory transfer of at least 20 per cent of the net profits to aforesaid fund; |
| |
|
| (iv) |
Authorizing Company Law Board (CLB) to direct a defaulting NBFC to repay deposits; |
| |
|
| (v) |
Vesting the Reserve Bank with the powers to: |
| |
|
| (a) |
issue directions to NBFCs regarding compliance with the prudential norms; |
| |
|
| (b) |
issue directions to NBFCs and their Auditors on matters relating to balance sheet and undertake special audit as also to impose penalty on erring auditors; |
| |
|
| (c) |
prohibit NBFCs from accepting deposits for violation of the provisions of the RBI Act and direct NBFCs not to alienate their assets; |
| |
|
| (d) |
file winding up petition against NBFCs for violations of the provision of the Act/directions; |
| |
|
| (e) |
impose penalty directly on NBFCs for non-compliance with the provisions of the Act. |
| New Regulatory Framework |
| |
| 4.50 Exercising the powers derived under the amended Act and in the light of the experience in monitoring of the activities of NBFCs, a new set of regulatory measures was announced by the Reserve Bank in January 1998. As a result, the entire gamut of regulation and supervision over the activities of NBFCs was redefined, both in terms of the thrust as well as the forces. |
| The salient features of the new framework are as under: |
| |
| (a) NBFCs have been classified into 3 categories for purposes of regulation, viz., (i) those accepting public deposits; (ii) those which do not accept public deposits but are engaged in the financial business; and (iii) core investment companies which hold at least 90 per cent of their assets as investments in the securities of their group/holding/subsidiary companies. |
| |
| While NBFCs accepting public deposits will be subject to the entire gamut of regulations, those not accepting public deposits would be regulated in a limited manner. Therefore, the regulatory attention will be focussed primarily on NBFCs accepting public deposits. |
| |
| (b) Borrowings by way of inter corporate deposits, issue of secured debentures/bonds, deposits from shareholders by a private limited company and deposits from directors by both public as well as private limited companies have been excluded from the purview of public deposits. The Reserve Bank regulations on quantum, rate of interest, period of deposits, etc. will be applicable only with respect to public deposits. |
| |
| (c) The overall ceiling on borrowing by NBFCs has been removed and has been sought to be decided on the basis of capital adequacy requirements. |
| |
| (d) The quantum of public deposits that can be raised by NBFCs has been directly linked to the level of credit rating. An NBFC intending to accept public deposit must have minimum prescribed credit rating from any of the approved credit rating agencies. |
| |
| (e) The NBFCs having NOF of less than Rs.25 lakh have been prohibited from accepting deposits from the public. |
| |
| (f) In order to streamline the working of NBFCs which held public deposits in excess of their new entitlements, a period of 3 years has been allowed to these companies to reduce/regularize their excess deposits, subject to the condition that at least 1/3rd of excess should be reduced every year commencing from the year ended December 1998 and to wipe out the entire excess by December 31, 2000. NBFCs having investment grade credit rating can accept fresh public deposits and renew such maturing deposits, while NBFCs which do not have the minimum credit rating or are not rated can only renew maturing public deposits. It is also expected that during the three-year period, NBFCs could obtain/improve their credit rating, improve their NOF, substitute public deposits by other forms of debt and arrange for alternative sources of funds. |
| |
| (g) NBFCs have been debarred from offering an interest rate exceeding 16 per cent per annum and a brokerage fee over 2 per cent on public deposit. |
| |
| (h) For the first time, prudential norms have been prescribed for NBFCs for mandatory compliance under the statutory powers vested with RBI. The companies which accept public deposits are required to comply with all the norms pertaining to income recognition, accounting standards, asset classification, provisioning for bad and doubtful debts, capital adequacy, credit/investment concentration norms, etc. |
| |
| (i) To improve the liquidity of NBFCs, the percentage of liquid assets required to be maintained by them has been enhanced to 12.5 per cent and further to 15 per cent with effect from April 1, 1998, and April 1, 1999, respectively. |
| |
| (j) As a move towards greater disclosure and transparency, NBFCs accepting public deposit have been asked to furnish certain essential information regarding their financial activities with regard to their applications for deposits and advertisement for soliciting deposits. Depositors have been cautioned not to be lured by interest rates alone and be careful to understand the financial position of the concerned company. |
| |
| (k) Having regard to the risk profile of the assets of NBFCs, capital adequacy has been enhanced from 8 per cent to 10 per cent with effect from April 1, 1998, and further to 12 per cent with effect from April 1, 1999. |
| |
| (l) NBFCs, other than the core investment companies, not accepting public deposits have been exempted from the regulations on interest rates, period, ceiling on quantum of borrowings. However, prudential norms, which have a bearing on the true and fair status of the financial health of these companies as reflected in their balance sheets, have been made applicable to these companies, except those relating to capital adequacy and credit concentration norms. The responsibilities of ensuring compliance of these regulations have been entrusted to the statutory auditors of these companies and the Reserve Bank has issued directions to the statutory auditors for this purpose. |
| |
| (m) Statutory auditors of NBFCs are required to report by exception to RBI any irregularity or violation of the RBI regulations on acceptance of public deposits and prudential norms. |
| |
| 4.51 By September 30, 1998, as many as 7,689 applications for issue of Certificate of Registration were scrutinized and disposed of. Of the above, 6,928 applications including453 applications of NBFCs holding/accepting deposits and new companies have been approved; 761 applications have been rejected. |
| |
| 4.52 Merchant Banking Companies have been exempted from the Provisions of the Reserve Bank of India Act, 1934, relating to compulsory registration (section 451A), maintenance of liquid assets (section 451B), creation of reserve fund (section 451C) and all provisions relating to deposit acceptance and prudential norms provided they are registered with SEBI. |
| |
| Supervisory Mechanism based on Khanna Committee Recommendations and Statutory Powers |
| |
| 4.53 The nature and extent of supervision of NBFCs, prepared in the backdrop of the provisions of the RBI (Amendment) Act, 1997, and the recommendations of the Khanna Committee (1995), were based on three criteria viz., (i) the size of an NBFC, (ii) the type of activity performed, and (iii) the acceptance or otherwise of public deposits. |
| |
| 4.54 The main thrust of supervision of NBFCs would henceforth be through an off - site surveillance mechanism. The Reserve Bank has worked out a comprehensive inspection arrangement and has devised special formats for off-site reporting/monitoring. The formats of the annual returns have accordingly been revised to seek additional details relating to core assets/income of the companies. In order to enhance the authenticity of the data furnished in the returns, the Reserve Bank has stipulated that these returns should be certified by the auditors of the company. The objective reporting of the auditors would be a critical input for monitoring the activities of NBFCs. Further, companies with asset size of Rs.100 crore and above have been asked to furnish an annual return giving the comparative position of their operational data for 3 years in respect of several balance sheet items, profit and loss accounts and certain key ratios. A proper analysis of the data contained in these returns would provide valuable information as to the working of these companies and their true financial health. Errors/discrepancies in such analyses are intended to trigger off on-site inspections of some of the companies. Receipt of returns and their prompt and effective scrutiny would be the means to exercise effective off-site surveillance over NBFCs and it is planned to carry out off-site surveillance tasks through extensive use of information technology. |
| |
| 4.55 On-site inspections of NBFCs with public deposits of Rs.50 crore and above is sought to be carried out annually and the other NBFCs will be inspected by rotation. On-site inspections will be carried out based on the CAMELS methodology (Capital Adequacy, Asset Quality, Management, Earnings, Liquidity and Systems). The CAMELS approach re-orients on-site inspection processes towards intensive examination of the assets of NBFCs, besides their liabilities. |
| |
| 4.56 In recent times, there has been considerable discussion on the concept of credit rating. International experiences are helpful for an understanding of the processes involved in credit rating (Box IV.2). The recent regulations pertaining to NBFCs have linked the quantum of deposits that NBFCs can raise directly to their credit rating. |
| |
| BOX IV.2 : CREDIT RATING: INDIAN AND INTERNATIONAL EXPERIENCES |
| |
| As financial markets have grown increasingly complex and global and borrower base has become increasingly diversified, investors and regulators have increased their reliance on the opinions of credit rating agencies. Simply defined, ratings attempt to provide a consistent and reasonable rank-ordering of relative credit risks, with specific reference to the instrument being rated. |
| |
| As capital flows have become increasingly global and turbulence in one economy has had contagion effects across the globe, credit ratings have spread outside the domain of the home country to overseas markets. As it stands at present, credit ratings are in use in the financial markets of most developed economies and several emerging market economies as well. The principal characteristics of the major rating agencies is given in Table 1V.A. |
| Table IV.A : Selected Rating Agencies outside India |
| |
|
|
|
| Name of the agency |
Home Country |
Ownership |
Principal rating areas |
| 1. Moody's Investors Service |
U.S.A. |
Dun and Bradstreet |
Full Service |
| 2. Fitch Investors Service |
U.S.A. |
Independent |
Full Service |
| 3. Standard and Poor's Corporation |
U.S.A. |
McGraw Hill |
Full Service |
| 4. Canadian Bond Rating Service |
Canada |
Independent |
Full Service (Canada) |
| 5. Thomson BankWatch |
U.S.A. |
Thomson Company |
Financial Institutions |
| 6. Japan Bond Rating Institute |
Japan |
Japan Economic Journal |
Full Service (Japan) |
| 7. Duff and Phelps Credit Rating |
U.S.A. |
Duff and Phelps Corpn. |
Full Service |
| 8. Japanese Credit Rating Agency |
Japan |
Financial Institutions |
Full Service (Japan) |
| 9. IBCA Ltd. |
United Kingdom |
Independent |
Financial Institutions |
| Over time, the agencies have expanded the depth and frequency of their coverage. The leading U.S.credit rating agencies rate not only the long-term bonds issued by corporates in the U.S., but also a wide variety of other debt instruments including, for example, municipal bonds, asset-backed securities, private placements, commercial paper programs and bank certificates of deposit (CDs). In addition, the leading rating agencies also play a major role in evaluating sovereign ratings. |
| |
| Most of the rating agencies have long had their own symbols--some of them use alphabets, others use numbers, many use a combination of both for ranking the risk of default. The default risk varies from extremely safe to highly speculative. Gradually, a rough correspondence among the ratings of the major agencies has emerged (Table IV.B). To provide finer rating gradations to help investors distinguish more carefully among issuers, Standard & Poor Corporation in 1974 and Moody's in 1982 started attaching plus and minus symbols to their ratings. Other modifications of the grading scheme-including the addition of a credit watch category to denote that a rating is under review-have also become standard. |
| Table IV.B : Long-term Debt Rating Symbols of Major International Rating Agencies |
|
| Investment Grade Ratings |
Speculative Grade Ratings |
|
| Name of the Agencies |
Interpretation |
Name of the Agencies |
Interpretation |
|
| S&P and Others |
Moody's |
S&P and Others Moody's |
|
|
| AAA |
|
Aaa |
Highest Quality |
|
BB+ |
|
Ba1 |
Likely to fulfill obligations, |
| |
|
|
|
|
|
|
|
ongoing uncertainty |
| AA+ |
|
Aa1 |
High Quality |
|
BB |
|
Ba2 |
As above |
| AA |
|
Aa2 |
High Quality |
|
BB- |
|
Ba3 |
As above |
| AA- |
|
Aa3 |
High Quality |
|
B+ |
|
B1 |
High-risk obligations |
| A+ |
|
A1 |
Strong Payment Capacity |
|
B |
|
B2 |
High-risk obligations |
| A |
|
A2 |
Strong Payment Capacity |
|
B- |
|
B3 |
High-risk obligations |
| A- |
|
A3 |
Strong Payment Capacity |
|
CCC+ |
|
|
Current vulnerability to default, |
| |
|
|
|
|
|
|
|
or in default (Moody's) |
| BBB+ |
|
Baa1 |
Adequate Payment Capacity |
|
CCC |
|
Caa |
As above |
| BBB |
|
Baa2 |
Adequate Payment Capacity |
|
CCC- |
|
|
As above |
| BBB- |
|
Baa3 |
Adequate Payment Capacity |
|
C |
|
Ca |
In bankruptcy or in default, or |
| |
|
|
|
|
|
|
|
other marked shortcoming |
| |
|
|
|
|
D |
|
D |
In bankruptcy or in default, |
| |
|
|
|
|
|
|
|
or other marked shortcoming |
|
| Regulators, like investors, value the cost savings achieved through the use of ratings in the credit evaluation process. As a result, they have come to employ a variety of specific letter ratings as thresholds for determining the capital charges and defining investment prohibitions. Although the rating agencies make no such assurances, the current use of ratings in regulation assumes a stable relationship between ratings and default probabilities. |
| |
| The concept of credit rating has been widely discussed and debated in India in recent times. Since the setting up of the first credit rating agency Credit Rating and Information Services of India Ltd. (CRISIL) in India in 1987, there has been a rapid growth of credit rating agencies in India (Table IV.C). The major players in the Indian market, apart from CRISIL, include Investment Information and Credit Rating Agency of India Ltd. (ICRA), promoted by IDBI in 1991 and Credit Analysis and Research Ltd. (CARE), promoted by IFCI in 1994. Duff and Phelps has tied up with two Indian NBFCs to set up Duff and Phelps Credit Rating India (P) Limited in 1996. |
| |
| Table IV.C: Credit Rating Agencies in India |
| |
|
|
|
| Name of the agency |
Ownership |
Principal rating areas |
|
| 1. Credit Rating and Information Services of India Ltd. |
ICICI |
Debt instruments, securitised assets |
| 2. Investment Information & Credit Rating Agency of India Ltd. |
IFCI |
Debt instruments |
| 3. Credit Analysis and Research Ltd. |
IDBI |
Debt instruments |
| 4. Duff and Phelps Credit Rating of India (P) Ltd. |
Duff & Phelps Corpn. |
|
| CRISIL rated the first bank in the country in 1992. The ratings provided by the different rating agencies (Indian and international) have been provided in Tables IV.D(1) and IV.D(2). However, local rating agencies do not rate foreign currency debt obligations. |
| |
| Table IV.D (1) : List of Public Sector Banks with Outstanding Ratings from Various Agencies |
|
| Name of the bank |
CRISIL |
ICRA |
S&P* |
MOODY'S $ ** |
|
| |
FD |
Bonds |
FD |
Bonds |
|
|
|
| 1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
|
| STATE BANK GROUP |
|
|
|
|
|
|
| 1. State Bank of India |
FAAA |
AAA |
|
LAAA |
|
Ba1 |
| 2. State Bank of Hyderabad |
|
|
MAAA |
LAA+ |
|
|
| 3. State Bank of Patiala |
|
|
MAAA |
|
|
|
| 4. State Bank of Saurashtra |
|
|
MAA+ |
LAA+ |
|
|
| 5. State Bank of Travancore |
|
|
|
LAA+ |
|
|
| 6. State Bank of Indore |
FAA |
|
|
|
|
|
| 7. State Bank of Mysore |
|
AA- |
|
|
|
|
| NATIONALISED BANKS |
|
|
|
|
|
|
| 8. Bank of Baroda |
|
|
|
LAAA |
BB+ @ |
Ba1 |
| 9. Bank of India |
|
|
|
LAA+ |
|
Ba1 |
| 10. Corporation Bank |
FAAA |
AAA |
|
|
|
|
| 11. Punjab National Bank |
|
|
MAA+ |
LAA+ |
|
Ba1 |
| 12. Canara Bank |
FAAA |
|
|
|
|
Ba1 |
| 13. Central Bank of India |
|
|
|
|
|
Ba1 |
| 14. Union Bank of India |
FAAA |
|
|
|
|
Ba1 |
| 15. Oriental Bank of Commerce |
FAAA |
|
|
|
|
Ba1 |
| 16. Dena Bank |
|
|
|
LAA |
|
|
|
| * Standard and Poor's Corporation, USA. |
| $ Moody's Investors Service |
| @ Long-term foreign currency rating |
| ** Long-term deposits rating |
| Note : FAAA (F Triple A): Highest safety; AAA (Triple A): Highest Safety; AA (Double A): High Safety; FAA (F Double A): High Safety. |
| MAAA : Highest Safety; MAA+ : High Safety; LAAA : Highest Safety; LAA+ : High Safety |
| Source: CRISIL |
| Table IV.D (2) : List of Public Sector Banks with Short-term Ratings |
| Outstanding from Various Agencies |
|
| Name of the Bank |
CRISIL |
ICRA |
S&P |
MOODY'S |
|
| STATE BANK GROUP |
|
|
|
|
| 1. State Bank of India |
P1+ |
A1+ |
B* |
P-2* |
| 2. State Bank of Hyderabad |
|
A1+ |
|
|
| 3. State Bank of Patiala |
|
A1+ |
|
|
| 4. State Bank of Saurashtra |
|
A1+ |
|
|
| 5. State Bank of Travancore |
|
A1+ |
|
|
| 6. State Bank of Indore |
P1+ |
|
|
|
| 7. State Bank of Mysore |
P1+ |
|
|
|
| 8. State Bank of Bikaner & Jaipur |
P1+ |
|
|
|
| NATIONALISED BANKS |
|
|
|
|
| 9. Indian Bank |
P1 |
|
|
|
| 10. Vijaya Bank |
P1 |
|
|
|
| 11. Bank of India |
P1+ |
|
B* |
|
| 12. Corporation Bank |
P1+ |
|
|
|
| 13. Punjab National Bank |
|
A1+ |
|
|
| 14. Canara Bank |
P1+ |
|
|
|
| 15. Central Bank of India |
|
A2 |
|
|
| 16. Union Bank of India |
P1+ |
|
|
|
| 17. Oriental Bank of Commerce |
P1+ |
|
|
|
| 18. Dena Bank |
|
A1+ |
|
|
|
| * Short-term foreign currency rating. |
| Note : A1+ : Highest Safety; A2 : High Safety |
| P-1 : The degree of safety regarding timely payment of the instruments is very strong. CRISIL may apply +' (Plus) or -(Minus) sign to reflect comparative standings within the category. |
| Source: CRISIL. |
| The ratings methodology for banks and financial institutions is essentially based on the CRAMEL approach (Capital Adequacy, Resources, Asset Quality, Management Evaluation, Earnings and Liquidity). |
| In spite of the advantages that the ratings process offers, several drawbacks remain. The ratings process attempts to provide a guidance to investors/creditors in determining the risks associated with the instrument/credit obligation. It does not attempt to provide a recommendation and does not take into account factors like market prices, personal risk/reward preferences that might influence investment decisions. Secondly, the ratings process is based on certain primitives. The agency, for instance, does not perform an audit. Instead, it has to rely solely on information provided by the issuer. Consequently, to the extent that the information provided is inaccurate and incomplete, the ratings process is compromised. Thirdly, to the extent that a certain instrument of a specific company attracts a lower rating, the company has an incentive to shop around for the best possible rating, compromising the authenticity of the rating process itself. |
| |
| References |
| 1. |
Ang, J. and Patel, K (1975) Bond Rating Methods: Comparison and Validation, Journal of Finance, May, 631-640. |
| 2. |
Carter, R and Packer,F. (1994) The Credit Rating Industry, Federal Reserve Bank of New York Quarterly Review, Summer-Fall, 1-26. |
| 3. |
Credit Rating and Information Services of India Limited. |
| 4. |
The Institute of Chartered Accountants of India (1998) Background Material for Continuing Education Programmes on Credit Rating, New Delhi. |
| Regulation over Residuary Non-Banking Companies |
| |
| 4.57 The operations of RNBCs were characterized by certain undesirable features like payment of high rates of commission, forfeiture of deposits, low or negligible rate of return on deposits, appropriation of capital receipt to revenue account and the consequent non-disclosure of the entire deposit liability in their books of accounts/balance sheets, negative or negligible NOF, levy of service charges on the depositors etc. Accordingly, the Reserve Bank had taken several measures to remove all these objectionable features. |
| |
| 4.58 The deposit-taking activities of the residuary non-banking companies are governed under the provisions of Residuary Non-Banking Companies (Reserve Bank) Directions, 1987, issued by the Bank under the provisions of Chapter IIIB of the Reserve Bank of India Act. In view of low or negligible NOFs, the quantum of deposits that could be accepted by these companies can not be linked to their NOFs. For safeguarding depositors' interests, these companies have been directed to invest at least 80 per cent of their deposit liabilities in bank deposits and approved securities. These securities are required to be entrusted to a public sector bank designated for the purpose and can be withdrawn only for the purpose of repayment of deposits. Furthermore, such companies are required to pay interest on their deposits which shall not be less than 6 per cent per annum in respect of daily deposit schemes and 8 per cent per annum for other deposit schemes. Other provisions of the directions relate to the minimum and maximum periods of deposits, the prohibition from forfeiture of any part of the deposit or interest payable thereon, the disclosure requirements in application forms and the advertisement soliciting deposits and the need to furnish periodical returns and information to RBI. |
| 4.59 With the new regulatory framework, the Reserve Bank has extended the prudential norms to RNBCs for mandatory compliance. |
| |
| Chit Fund Companies |
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| 4.60 The deposit taking activities of chit fund companies are regulated by RBI under the Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977. Such companies are allowed to accept up to 25 per cent of their NOF as deposits from public and upto 15 per cent from their shareholders. The other provisions of Directions are similar to those pertaining to NBFCs, in general. However, these companies are exempted from the requirement of compulsory registration with RBI because they are primarily engaged in conventional chit fund business and the concerned Registrar of Chit Funds would be monitoring their activities. The requirement of credit rating has also not been made mandatory for these companies. |
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| Nidhi Companies |
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| 4.61 The deposit taking activities of the companies which are notified as nidhi companies under section 620A of the Companies Act, 1956, are under the jurisdiction of the Reserve Bank. The Department of Company Affairs, Government of India, has issued guidelines for the operation of these companies and deployment of their funds. Though these companies are NBFCs, since they deal only with their own members, they have been exempted from the core provisions of the NBFC directions. The quantum of deposits to be raised by them is also not co-related to their NOF. However, they are precluded from advertising for deposits and payment of brokerage. A ceiling of 16 per cent per annum on the interest to be paid by them on their deposits has been prescribed. The Reserve Bank has devised a scheme for allowing relaxation on the interest rate ceiling for those nidhi companies that comply with certain conditions. |
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| Other NBFCs |
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| 4.62 Other NBFCs viz., insurance companies, stock broking companies, merchant banking companies, housing finance companies, etc, which are covered by the generic term NBFC' but are regulated by other regulatory authorities, have been exempted from the RBI regulations in order to avoid duality of control. |
| Unincorporated Bodies |
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| 4.63 The deposit-taking activities of unincorporated bodies are governed under the provisions of chapter IIIC of the RBI Act. Under the pre-amended provisions of chapter IIIC, an individual was allowed to accept deposits from not more than 25 persons and a partnership firm/association of individuals from not more than 25 persons per partner/individual subject to a maximum of 250 persons, excluding relatives in all the cases. Some of the unincorporated bodies, however, devised ingenious means to circumvent the above provisions and issued advertisements by offering attractive rates of return on deposits. Many of such unincorporated bodies failed to repay their deposits, once they mature. The Reserve Bank cautioned the general public by issuing an advertisement in the State of Tamil Nadu where such malpractices were rampant. There was, however, no let up in the activities of such operators to dupe the gullible public. These provisions of Chapter IIIC were, therefore, amended by the RBI (Amendment) Act, 1997, which came into force from April 1, 1997. In terms of the amended provisions of section 45-S, unincorporated bodies, whose principal business is that of receiving deposits or that of a financial institution, such as lending, investment in securities, hire purchase finance or equipment leasing, have been prohibited from accepting any deposits whatsoever. However, such an unincorporated body can collect deposits from relatives as specified in the Act and also borrow from banks, financial institutions, etc., for carrying on its activity. Unincorporated bodies have also been prohibited from issuing advertisement in any form soliciting deposits with effect from April 1, 1997. |
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| 4.64 Unincorporated bodies which accept deposits in violations of the provisions of Chapter IIIC of the RBI Act are liable to prosecution under the provisions of Reserve Bank of India Act. The State Governments have been concurrently empowered to prosecute the offenders. |
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| Other Developments |
| (i) |
Constitution of Informal Advisory Group |
| 4.65 To ensure better appreciation of the supervisory concerns of RBI and to have feedback on the functioning of the NBFCs, an Informal Advisory Group on Non-Banking Financial Companies was constituted in May 1998 consisting of representatives of Reserve Bank, industry majors and NBFC associations. The Group will review the implementation of the regulations and act as a forum to which specific issues could be referred to. The Group will be meeting at quarterly intervals and submit its recommendations to the Bank. |
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| (ii) Study Group to design new balance-sheet format for NBFCs |
| 4.66 A Study Group has been constituted to design a format for the balance-sheet for NBFCs to adequately reflect the nature of their functions. |
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| (iii) Task Force on NBFCs |
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| 4.67 In August 1998, a Task Force has been established under the Chairmanship of Special Secretary (Banking), Ministry of Finance. The terms of reference of the Task Force are, (i) examining the adequacy of the present legislative framework; (ii) to devise improvements in the procedure relating to customer complaints; (iii) considering the need, if any, for a separate regulatory agency; (iv) examining whether state governments could be involved in the regulation of NBFCs. The Task Force has submitted its Report to the Government in end-October 1998 and is under consideration. |
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| Trends in the Growth of Deposits with Non-Banking Companies during the year ended March 31, 1997 |
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| 4.68 On the basis of statutory returns received from the financial and non-financial companies, the RBI undertakes annual surveys on deposits with non-banking companies as at the end of March every year. The comparative position of deposits with non-banking companies as on March 31, 1996, and 1997 is presented in Appendix Table IV.6 and Appendix Table IV.7. |
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| 4.69 At the end of March 1997, the aggregate deposits, comprising those of financial companies, non-financial companies and miscellaneous non-banking and residuary non-banking companies, stood at Rs.3,57,153.0 crore registering an increase of Rs.61,808.3 crore (20.9 per cent) as compared to the positiion at the end of March 1996. Of this, the deposits of 2,376 non-financial companies accounted for Rs.2,23,873.1 crore (62.7 per cent) whereas the deposits of 10,122 financial companies [including Housing Finance Companies (HFCs)] accounted for Rs. 1,16,635.4 crore (32.7 per cent); the remaining Rs.16,644.5 crore (4.6 per cent) being accounted for by the miscellaneous non-banking and residuary non-banking companies. The aggregate regulated deposits of non-banking companies as at the end of March 1997 was Rs.71,615.6 crore, recording an increase of Rs.18,135.1 crore (33.9 per cent) when compared to the position as at the end of March 1996. Of the aggregate regulated deposits, the financial companies (including HFCs) contributed Rs.52,893.3 crore (73.9 per cent), the non-financial companies contributed Rs.9,592.0 crore (13.4 per cent) and the residuary and miscellaneous non-banking companies contributed Rs.9,130.3 crore (12.7 per cent). The regulated deposits of non-banking companies formed 14.4 per cent of the aggregate deposits of scheduled commercial banks as at the end of March 1997 as against 12.7 per cent as at the end of March 1996. |
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