NBFCs to rework models as RBI turns up the heat

MUMBAI: The Reserve Bank of India’s (RBI) draft guidelines restricting the exposure of banks to non-banking finance companies (NBFCs) are bound to affect the financing model of NBFCs. The guidelines prohibit banks from having an exposure of more than 5% of its networth to a single NBFC, while aggregate exposure to all NBFCs has been capped at 40%. According to a senior foreign banker, foreign banks used to be one of the major financiers in this sector.

The new norms are bound to affect the financing model of NBFCs. Other than funding through banks, NBFCs normally raise finances through commercial paper and debentures, and in some instances, through bonds. These NBFCs will now have to either bring in fresh capital or find other alternate sources of funding. This, in return, will increase the cost of funding for NBFCs.

Funding for these activities by NBFCs of foreign banks are likely to be curtailed. Foreign banks with a branch presence in India who have NBFCs promoted by the parent or group of a foreign bank like Citi and StanChart will now have to submit consolidated prudential returns. Although foreign banks have been adhering to conglomerate reporting for the past seven quarters to the RBI, these banks will now have to adhere to prudential regulations.

What this would mean is that there would now be restrictions in the form of a capital market exposure of 5% of previous year’s outstanding. Advances would now be applicable even to the NBFCs other than restrictions like maximum of Rs 20 lakh funding for loan against shares and others.

Also, single and group exposure norms would also kick in. NBFCs which are not part of any bank would also be impacted as they would also have to follow single and group exposure norms and would also have to look at other types of funding.

Bankers feel that bigger and AAA rated NBFCs may not be as badly affected as the smaller ones. As cost of funding for these firms go up, financing cost would also rise. Promoters, who have been aggressively increasing their stakes in their companies will now find it more difficult to raise finances.

The business models of some of these NBFCs would also have to be tweaked. For instance, NBFCs which have been giving loans to the corporate sector will now have to get used to single and group limits. In case they look at a securitisation model for raising finances, they will need to look at a wider range of activity rather than ‘chunky’ corporate assets. However, due to increasing competition, it will have to be seen how much flexibility these NBFCs would have in raising interest rates. Otherwise, they would see their margins squeezed.

According to bankers, foreign entities which have been looking at entering the country through the NBFC model would have to bring in more capital and would need to look at a broader product mix for their foray into the country.