RBI puts restrictions on bank funds for NBFCs
The Reserve Bank of India (RBI) has placed several restrictions on bank funding to non-banking finance companies (NBFCs).
By TNN |
MUMBAI: The Reserve Bank of India (RBI) has placed several restrictions on bank funding to non-banking finance companies (NBFCs). The RBI measures (announced recently through a circular) seek to check the tendency of banks to extend funding to customers through their NBFC arms, particularly for sensitive sectors such as the stock market.
The key areas where banks are not allowed to lend to NBFCs are: investments of NBFCs in shares and debentures of any company, grant of unsecured loans and inter-corporate deposits by NBFCs in any company, loans by NBFCs to their subsidiaries and group companies, and funding to NBFCs for on-lending to individuals for subscribing to IPOs and discounting/ rediscounting of bills by NBFCs.
Shares and debentures can���t be accepted as collateral securities for secured loans granted to NBFCs. RBI has said bank funding to residuary non-banking companies (RNBCs) likeSahara and Peerless will be restricted to their net owned-funds (NOFs). NOFs are the paid-up equity capital and free reserves after deducting accumulated losses, deferred revenue expenditure and other intangible assets.
Significantly, banks are not allowed to execute guarantees covering inter-company deposits and loans for NBFCs. This makes them a guarantor for repayment of deposits or loans accepted by such companies. ���The restriction would cover all types of deposits or loans irrespective of their source, including those received by NBFCs from trusts and other institutions,��� stated the RBI circular.
The key areas where banks are not allowed to lend to NBFCs are: investments of NBFCs in shares and debentures of any company, grant of unsecured loans and inter-corporate deposits by NBFCs in any company, loans by NBFCs to their subsidiaries and group companies, and funding to NBFCs for on-lending to individuals for subscribing to IPOs and discounting/ rediscounting of bills by NBFCs.
Shares and debentures can���t be accepted as collateral securities for secured loans granted to NBFCs. RBI has said bank funding to residuary non-banking companies (RNBCs) likeSahara and Peerless will be restricted to their net owned-funds (NOFs). NOFs are the paid-up equity capital and free reserves after deducting accumulated losses, deferred revenue expenditure and other intangible assets.
Significantly, banks are not allowed to execute guarantees covering inter-company deposits and loans for NBFCs. This makes them a guarantor for repayment of deposits or loans accepted by such companies. ���The restriction would cover all types of deposits or loans irrespective of their source, including those received by NBFCs from trusts and other institutions,��� stated the RBI circular.
���The guarantees should not be issued for the purpose of indirectly enabling the placement of deposits with NBFCs,��� the circular added. A number of banks have set up NBFCs for expanding their asset base. These include Citigroup, which owns Citi Financial and Stanchart (Stanchart Investments & Loans).
A few others such as Barclays HDFC Bank and HSBC are in the process of setting up NBFCs. The only exception is lending to stock broking companies, which will be able to avail of bank finance to transact in shares as stock-in-trade. The RBI has been concerned about the banks using the NBFC channel to circumvent sectoral caps and prudential norms for granting loans.
This is pertinent in the case of loans against shares, where there is a ceiling of 5% (of the bank���s advances at the end of the previous financial year) for such lending. Through an NBFC, a bank can continue to lend and at the same time, be fully within the limits set by RBI on its own lending.
Banks are also prohibited from providing bridge loans of any nature or funding against a upcoming equity or bond issue. Banks are not able to give bridge loans against raising of long-term funds from the market by the company. Bridge loans cannot be granted in any other form such as floating rate bonds. Banks cannot enter into lease agreements with an equipment leasing company. According to bankers, the purpose behind this could be to avoid sale-and-lease back transactions, which go on to regularise defaults by NBFCs.
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