Overseas arms of NBFCs to raise loans on own steam

NEW DELHI: Foreign subsidiaries of Indian finance companies may be barred from raising funds overseas by pledging collateral from their parent firms under tighter rules being considered by the RBI.

RBI is not keen on non-banking finance companies (NBFCs) extending guarantees on behalf of their overseas units, and also does not want domestic firms to set up thinly-capitalised ���shell companies��� that are incorporated overseas but don���t have significant assets of their own.

The tighter norms have been triggered by a view in the RBI that overseas units of finance companies should not be used as a vehicle for raising resources for creating assets in India. The new rules will also apply to banks planning finance subsidiaries abroad.

A finance ministry official said the RBI was also planning steps to ensure links between the Indian company and its overseas subsidiary were absolutely minimum. ���This would imply that foreign arms of NBFCs would not be allowed to get loans on the basis of credibility and goodwill of their India-based parents,��� said the official, who did not wish to be named.

A second official, who also requested anonymity, said the RBI���s steps were aimed at ensuring the smooth functioning of domestic NBFCs. ���For this, it is essential that these entities do not have undue exposure to assets having high risk.

The subsidiaries of these institutions (should) have sound financial fundamentals of their own.���
The RBI is yet to formally notify its new set of rules, although officials say the tighter norms have been finalised internally.

The central bank���s planned move is its first measure to put the brakes on overseas activities of NBFCs and comes in the wake of the government having to step in last month to save some NBFCs after banks refused to honour their lines of credit. After intervention by the RBI and the government, banks lifted the freeze on funds to the sector.

The RBI last month also relaxed norms for NBFCs of strategic importance for raising capital from the market. Finance firms with capital of Rs 100 crore and more and lend to the infrastructure sector are classified as NBFCs of strategic importance by the government.