Rule changes for NBFCs: An unwelcome intrusion?

The global financial crisis sharply brought into light the role of non-banking financial companies (NBFCs) and the relative ease for “shadow banking” entities in India to conduct the business of lending. For instance, unlike banks, NBFCs could take pledges of shares of a company exceeding the lower of 30% of the NBFC’s paid-up share capital or 30% of the company’s share capital, and while banks had to declare an asset as “non-performing” at the end of 90 days, for NBFCs this period was 180 days and 12 months in certain cases. Similarly, guidelines for restructuring of advances by NBFCs were only issued in January 2014.

The increasing exposure of banks to the NBFC sector was another glaring issue, raising concerns of regulatory arbitrage and systemic risk.

Overhaul overdue?

Despite the relative lack of action, the Reserve Bank of India (RBI) has been considering and deliberating the overhaul of the regulatory framework for NBFCs. Based on a report and recommendations submitted in August 2011 by the Working Group on the Issues and Concerns in the NBFC Sector, the RBI placed draft guidelines for public comments on its website in December 2012. While no further action was taken on these draft guidelines, based on the recommendations and report of the Working Group to Review the Existing Prudential Guidelines on Restructuring of Advances by Banks/Financial Institutions, the RBI issued guidelines on restructuring of advances by NBFCs in January 2014.

Sawant Singh is a partner, Kartikeya Singh is a counsel and Aditya Bhargava is a principal associate at the Mumbai office of Phoenix Legal.