An internal group of the Reserve Bank of India Monday suggested that credit assistance to non-banking finance corporations and stock broking companies should be part of banks' capital market exposure.
Currently, banks' exposure to the capital market is restricted to 5 per cent of their outstanding loans, which will soon be revised to 40 per cent of the total net worth of the bank.
The RBI Monday released the draft report of the internal working group on issues relating to a level-playing field, regulatory convergence and arbitrage in the financial sector.
The group is also of the view that bank finance to non-deposit taking NBFCs should be limited to a certain percentage of the total capital market exposure of banks.
In another sweeping recommendation, the group has suggested a slew of measures to check the borrowings done by non-deposit taking NBFCs. One of this is to treat commercial papers as public deposits.
The other includes introducing a capital adequacy ratio, stipulate a gearing ratio, which is borrowing as a multiple of capital funds as in the case of development finance institutions or prescribing an acceptable debt equity ratio.
Moreover, in line with the norms for banks, deposit taking NBFCs cannot lend more than Rs 10 lakh against security of shares and debentures and PSU bonds, and Rs 20 lakh if the securities are in demat format.
The NBFC sector, excluding non-banking companies consists of 436 deposit taking and 12,615 non-deposit taking NBFCs as in January end 2006.
Out of the deposit taking NBFCs, 16 companies with asset size above Rs 500 crore account for 48.6 per cent of the aggregate deposits of Rs. 3,777 crore of the sector.
To begin with, these norms could cover all deposit-accepting NBFCs and non-deposit taking NBFCs with an asset size of Rs 100 crore and above.
In addition to this, the panel has suggested that the RBI must consider the presence of banks' NBFC subsidiaries while examining the proposals for branch/ATM authorisation.
To create a level-playing field between the NBFC subsidiary of a bank and other NBFCs, the group has proposed allowing subsidiaries floated by banks to undertake discretionary portfolio management services in line with those NBFCs not regulated by RBI.
In this context, the group has recommended that the framework of consolidated supervision may be applied even to NBFCs promoted by foreign banks under the automatic route and the branch of that foreign bank, even though the parent-subsidiary relationship does not exist between the NBFC and the branch.
The group has clarified that once an NBFC is established with the requisite capital under FEMA, subsequent diversification either through the existing company or through downstream NBFCs would be permitted only in the 19 permitted activities under the automatic route.
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