Medium and small sized Non-Banking Financial Companies (NBFCs) are likely to be hit by rising costs as they transition to the new regulatory framework prescribed by the Reserve Bank of India (RBI), aimed at maximizing regulatory parity between banks and non-banks. bank lenders. As they prepare to face higher expenses for directives such as implementing basic financial systems, they continue to engage with the regulator to seek a smoother and more phased migration to the new standards.
Industry executives FE spoke to said companies are looking for easing in implementation and additions to guidance to achieve a smoother transition. One of the requested additions is that the loan limit for invoking recovery proceedings under the Securitization and Reconstruction of Financial Assets and Enforcement of Collateral Act (Sarfaesi) be harmonized for banks and NBFCs to Rs1 lakh. Another request is that housing finance companies (HFCs) be allowed to exclude cash and bank balances while performing calculations to determine the minimum exposure they should have to home loans.
Rajesh Sharma, MD, Capri Global Finance, said the request to amend the Sarfaesi test had been sent to both the Ministry of Finance and the RBI. “Ideally, Sarfaesi regulation should also be brought up to par with banks. NBFCs can only make Sarfaesi requests for loans above 20 lakh, while banks, small finance banks and lenders get more than 1 lakh. This disparity should disappear,” he said.
According to Sharma, if the Sarfaesi option is unavailable in some cases, NBFCs waste time in the recovery process. This, in turn, erodes asset values and increases the cost of credit.
HFCs will have their own set of issues as they will all be classified in the mid-tier. The cost of transition is going to be higher for a few smaller HFCs, those with asset books below Rs 100 crore, which were not so tightly regulated before, said Rohit Chokhani, MD, Easy Home Finance.
“For companies moving to ML, some were already quite tightly regulated, especially those with asset sizes of Rs 250 crore-1,000 crore. At the same time, a handful of companies that have a net worth or asset size of less than Rs 100 crore, it might be difficult for them to comply because after entering the ML layer, there are a host of ‘activities where the cost of running businesses will be a bit higher,’ said Chokhani. For example, a compliance officer will now be mandatory for all HFCs and this could increase costs, as would setting up a basic financial system. Given that the regulatory architecture of the HFC segment is about to tighten, the HFC community is now seriously considering whether it would not be better to apply for licenses for small financial banks (SFBs). Housing Development Finance Corporation has already announced a merger plan with HDFC Bank.
The HFC space is also responding to new regulations in other ways. For example, HFCs with significant construction finance exposure are now considering transferring them to their NBFC arms to comply with new standards on commercial real estate exposure limits. It helps that many of these companies are owned by large conglomerates.
Large risk standards are likely to be less of a problem for retail NBFCs, industry executives say. In a recent conversation with investors, YS Chakravarti, MD and CEO of Shriram City Union Finance, stated that the cap on single counterparty and group exposures, set as a percentage of NBFC Tier I capital, results in quite a large expense. “Wholesale NBFCs will need to reassess their loans if they have high exposures and take a more conservative approach, which will lead to lower risk to their book and in the long run will benefit the industry,” he said. declared.
Chokhani said one specific regulation challenging all HFCs is the one regarding the inclusion of cash and bank balances in total assets.