RBI increases CAR for NBFCs - Update - LKP Securities

Bringing NBFCs closer to banks

All deposit taking NBFCs are required to maintain a minimum capital ratio (Tier I and Tier II capital), of 15% by March 2012 as compared to the current minimum required of 12%.This means if the NBFC disperses a loan of Rs 100, it would have to maintain a minimum capital base (equity + debt) of Rs 15.

Previously non deposit taking NBFCs, systemically important, were asked to step up their CAR to 15% by March 2011.

RBI has a lower degree of regulatory and supervisory controls on NBFCs as compared to banks. The main distinguishing factors are the absence of CRR requirements like banks which mean that instruments such as credit policy have an indirect impact on NBFCs. Also, NBFCs lack deposit insurance coverage and refinance facilities from RBI which means protection for depositors is lower. They also do not have cheque issuing facilities and are not part of the payment and settlement system keeping them away from regular monitoring and accounting purview.

No spurt in capital raising

Large NBFCs maintained CAR at a higher margin above regulatory requirement. STFC maintained a CAR of 20% plus despite the 12% requirement, in order to command a higher credit rating of AAA. However, post the 300 bps increase of the minimum requirement of CAR it is unlikely that the NBFCs continue to maintain the same differential between the required CAR and that maintained by large NBFCs. Thus we don't expect any unscheduled capital raising due to the recent regulatory change.

Borrowers to feel the impact

NBFCs play a crucial role in broadening access to financial services, enhancing competition and diversification of the financial sector. NBFCs cater not only to various sectors as auto, housing, consumer related, agri, infra, textiles etc but also various purposes such as business, personal, consumption related. Although we don't expect the larger NBFCs to be disturbed, borrowers might be impacted through higher rates and reduced flow to certain asset classes.

Source : Equity Bulls

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