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Taskforce to protect NBFCs' depositors

The government has decided to appoint a taskforce under the chairmanship of the special secretary, banking, to suggest redressal measures for the depositors with the non-banking finance institutions in the country.

The taskforce will be asked to submit its report to Finance Minister Yashwant Sinha within six weeks, it was announced in the Rajya Sabha on Monday.

Replying to a calling attention motion on failure of non-banking finance institutions to return the deposits of the public, the finance minister said the taskforce would be asked to suggest amendment in the 1997 legislation in such a manner that measures set in motion a summary procedure of confiscating the property of the erring institution.

The minister agreed with the House that the 1997 legislation was inadequate to deal with the situation.

He said the government would ensure that some of the non-banking finance institutions which indulged in violation of laws and criminal activities were suitably dealt with.

Sinha said the government realised that the state governments had to play an important role in this regard and he had called a meeting of the state finance ministers to discuss the matter.

In order to improve the regulatory framework, the Reserve Bank of India Act was amended in January 1997. Increased powers were vested in the RBI. Unincorporated bodies were prohibited from accepting deposits for the purpose of lending, Sinha said.

He said that pursuant to the amendment, the RBI has taken a number of regulatory measures and supervisory steps. The bank has issued new NBFC policy in January 1998 in terms of which the NBFCs accepting public deposits should have at least investment-grade credit rating and must comply with norms on income recognition, accounting standards, asset classification, provisioning for bad and doubtful debts, capital adequacy and credit/investment concentration norms. The new regulatory framework is expected to ensure greater protection to public deposits.

The NBFCs are now required to go in for compulsory registration with the RBI. Ceilings have been imposed on the quantum of deposits which can be raised as well as interest rates which can be offered.

Since January 1997, the RBI has prohibited 35 NBFCs from accepting fresh deposits including renewal of deposits and from alienating assets of the companies.

The minister said the NBFCs have a significant role to play in the Indian financial system. There are some sectors which look to the NBFCs for finance since commercial banks shy away from financing such sectors. It is our endeavour to work towards a healthy NBFC sector, which can be enabled to play its legitimate role in meeting the requirements of its clientele.

Prior to 1997, there were no entry-level norms and any two persons could set up an NBFC. As a result there were more than 40,000 such companies registered with the registrar of companies.

As many as 10,054 of them were submitting returns, and that too on an irregular basis, to the RBI. Only 832 such companies opted for registration with the RBI since registration was not compulsory at that time.

The size of the sector, which witnessed a mushroom growth from 1991 to 1996, wide variety of the NBFCs in terms of size and performance as well as lack of suitable statutory powers with the RBI made the regulation of this sector an extremely difficult exercise.

Further, there were unincorporated bodies accepting deposits and offering unrealistically high rates of interest in addition to gifts of various kinds to prospective depositors. The deposit mobilisation of NBFCs only was being regulated on the basis of regulations issued by the RBI.

These regulations proved to be ineffective with the result that many NBFCs did not even report their operations to RBI. The prudential norms prescribed for the registered NBFCs by the RBI in 1994 were not complied with and the half-yearly returns were not being submitted by most of the NBFCs.

Most NBFCs did not go in for registration. In addition to high and unrealistic rates of interest, some NBFCs also offered gifts through brokers or agents to prospective depositors. The rate of interest being much higher than those offered by the banks persuaded many unsuspecting depositors to deposit their funds with NBFCs and unincorporated bodies, which were accepting deposits.

In their endeavour to service the high rate of returns offered, some NBFCs deployed their funds in extremely risky sectors thus endangering the safety of funds.

Initiating the debate, Gurudas Das Gupta (CPI) decried the lacunae in the law and said the RBI had failed to check these NBFCs which had defrauded the innocent people to the tune of Rs 150 billion.

Das Gupta ascribed the mushrooming of these companies between 1991 and 1996 to ''economic misadventure'' of the government in the name of liberalisation.

He said an overburdened RBI could not tackle the menace. The government must set up a separate agency to deal with NBFCs. The agency should also be empowered to look into complaints of the depositors, he added.

Das Gupta suggested that the RBI Act be amended to give it more teeth.

He wanted the government to look into the operations of some plantation companies which defrauded the ignorant investors. The government's electronic media should not carry advertisements of such companies, he said.

Intervening, Sinha said the plantation companies were outside the purview of the calling attention motion.

UNI