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No fresh RBI probe into Tata Finance

BS Banking Bureau in Mumbai

The Ferguson fiasco will not trigger a fresh probe by the Reserve Bank of India into the Tata Finance controversy.

Last year, the Tatas had moved the RBI immediately after unearthing the financial mismanagement in its non-banking finance company arm and promised to make good the fall in its capital adequacy ratio.

Accordingly, the Tatas pumped in money and took care of the Tata Finance's depositors' interests. The Tatas also restructured the NBFC arm in accordance with a plan submitted to the regulator.

"The RBI's concern is the safety of the depositors. It had asked the company not to take fresh deposits from the public and redeem the existing deposits in due course. The Tatas have complied with those stipulations. Hence, that chapter is closed," said a source.

However, keeping a close tab on all deposit-taking NBFCs is an on-going practice for the regulator. "It will continue to supervise and inspect the books of Tata Finance along with other deposit-taking NBFCs and if anything is found wrong in future the companies will be directed to rectify the irregularities," the source added.

Tata Finance is said to have propped up its CAR through circular deals in fiscal 2001. Its inter-corporate deposit exposure to the erstwhile Tata Finance subsidiary Niskalp jumped from Rs 2.20 billion to Rs 5.02 billion during the year. The RBI rules stipulate that while computing the CAR, an NBFC's ICD exposure to other companies is to be netted off from its net owned funds.

However, during every quarter, Niskalp raised short-term loans from banks to repay the ICDs and Tata Finance, in turn, used to place the same funds again with Niskalp as ICDs. By this "financial engineering", Tata Finance was able to maintain its CAR every quarter.

"An NBFC is required to maintain 12 per cent CAR at the time of reporting to the regulator. The prime concern of the regulator is to protect the depositors' interest. If that is taken care of, normally the central bank does not take drastic steps against any company. The Tatas admitted the mismanagement and rectified the irregularities promptly," said sources.

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