RBI supersedes boards of two debt-laden Srei companies

Subject – Economy

Context – RBI supersedes boards of two debt-laden Srei companies

Concept –

After months of uncertainty over the debt-laden Srei Infrastructure Finance (SIFL) and Srei Equipment Finance (SEFL), the Reserve Bank of India superseded the boards of the Kolkata-based non-banking financial companies on governance concerns and defaults by the companies in meeting their various payment obligations.
This will pave the way for a debt resolution process under the Insolvency and Bankruptcy Code, similar to the recently concluded sale of Dewan Housing Finance Corporation Ltd (DHFL) to the Piramal group.

RBI’s powers in this regard –

The government has decided to give more powers to the central bank to regulate the non-banking finance companies and the regulator will have the power to supersede the board of the shadow banks, apart from those owned by the government.
According to the Finance Bill, if the RBI is satisfied that in the ‘public interest’ or to prevent the affairs of an NBFC being conducted in a manner detrimental to the interest of the depositors or creditors, the board can be superseded for a maximum five years and an administrator can be appointed.
The RBI will also regulate housing finance companies which are under the purview of the National Housing Bank.
The 2019-20 budget also proposed that foreign institutional investors and foreign portfolio investors will be allowed to invest in debt securities by shadow banks, which help NBFCs to raise more funds.
- The budget also provided some tax incentives to the NBFCs by treating them on par with banks.
- The interest on bad loans for deposit-taking NBFC and systemically important non deposit-taking NBFC will now be charged to tax on receipt basis.

What is a Non-Banking Financial Company (NBFC)?

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.
A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).

What is difference between banks & NBFCs?

NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:

NBFC cannot accept demand deposits;
NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

Is it necessary that every NBFC should be registered with RBI?

In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial company can commence or carry on business of a non-banking financial institution without a obtaining a certificate of registration from the Bank and without having a Net Owned Funds of ₹ 25 lakhs (₹ Two crore since April 1999).
However, in terms of the powers given to the Bank, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982,Housing Finance Companies regulated by National Housing Bank, Stock Exchange or a Mutual Benefit company.

What are systemically important NBFCs?

NBFCs whose asset size is of ₹ 500 cr or more as per last audited balance sheet are considered as systemically important NBFCs.
The rationale for such classification is that the activities of such NBFCs will have a bearing on the financial stability of the overall economy.

Types of NBFC –

To know about Regulatory Framework for NBFCs, please click here.