RBI’s tight rating norms may force closure of NBFCs

MUMBAI: Nearly 200 non-banking financial companies (NBFCs) face closure in the next few months, as they don’t meet the Reserve Bank of India’s (RBI) mandated requirement of minimum investment grade credit rating to accept deposits. These companies, comprising mostly localised small-time lenders, have now approached the regulator seeking relaxation in rating norms, pointing out that they are treated just like any large NBFC, industry insiders said.

In 2014, RBI had said that one of the primary regulatory requirements for accepting public deposits is to obtain a minimum investment grade credit rating. NBFCs are allowed to raise 1.5 times their net worth as deposit to fund their operations. But many companies are unable to raise funds at competitive costs.

“Close to 190 NBFCs are facing closure as they will not be allowed to raise deposits and they do not have any other avenues to raise funds,“ said Alok Sondhi, managing director at PK Finance, a Punjab-based small NBFC. “We have met with the Reserve Bank of India to ask for relaxation of rating norms.” Industry executives said small NBFCs with an asset base of less than Rs 5 crore are treated on par with a large NBFC having asset base of Rs 500 crore and above.

More than 80% of the 11,000 NBFCs registered with the RBI are small and mediumsized. These are family-run companies that have built a niche for themselves in their limited area of operation. “There is a crying need to provide these companies with an alternative source of funding,“ said Raman Aggarwal, chairman at FIDC Finance Industry Development Council, a self-regulatory organisation for NBFCs.

All small NBFCs should also be allowed to avail refinance from state-run Micro Units Development and Refinance Agency Bank (MUDRA Bank), he added. Creating a refinance mechanism for NBFCs has also been a long standing demand of the sector.

Credits ET Realty

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