Thursday, May 6, 2010

Kabhi Khushi, Kabhi Gham!

Non Banking Financing Companies in India

Ever since India has embarked on the Economic Reforms and Banking Sector Reforms in 1991/1998 (thanks to Mr Narasimham, ex-Governor of RBI who headed two important Committees), there have been encouraging news in the media about working of banks and improvement of health of the financial system.  Inspite of several changes in Governments / Political Parties in Power, introduction of several reforms in various fields simultaneous with removal of licence-raj scenario, Banks and Non-Banking Financial Companies (NBFCs) have been facing the brunt.  Much can be said about the phenomenal changes in the working of banking system - be it in Balance Sheet Management, Technology like ATMs, e-Banking, Dematerialisation, Core Banking Solution, SWIFT, Asset Liability Management (ALM) or Risk Management, Prudential Norms (like changes in CRR, SLR, introduction of CAR) and so on. 

The country cousin of banks (Public, Private - Old & New, Foreign, Cooperative, Regional Rural and Local Area Banks) are the Non Banking Financing Companies (NBFCs) popularly known as private finance companies.  No doubt they are ancient and have been playing a very responsible role in the Financial System by offering para-banking facilities.  Unfortunately, during the period when Commercial Banks were undergoing health-check up, there was an unhealthy mushrooming of NBFCs in early nineties. These could be listed as Companies engaged in Chit Funds, Nidhis, Investment, Leasing, Hire Purchase, Housing Finance, Credit Cards, Locker Facilities, Mutual Funds and Asset Management, Venture Capital and Private Equity, Merchant or Investment Banking, Asset Reconstruction, Credit Rating, Credit Information Bureaus and so on. 

But, for some interesting reasons and thanks to the Grand Scam by Mr CR Bhansali in late nineties, RBI and Government of India had appointed Vasudev Committee to enquire into their working and streamline the system to clean up the mess.  Around that time NBFC became a dirty word.  A clear picture emerged then as to registration, credit rating and regulation of NBFCs by RBI and SEBI.  Prudential Norms and guidelines similar to Commercial Banks were also prescribed for NBFCs.  With such a move, the large number of over 45,000 NBFCs got checked both by RBI and SEBI in respective zones of control and the number now is around one thousand.  Of course, lakhs of gullible and innocent investors got cheated in the decade of nineties by investing their hard-earned savings in high-interest bearing fixed deposits or pseudo or junk-stocks.  It is interesting to read in the news that RBI has withdrawn licences to 5 NBFCs in Bangalore, Chennai and Mumbai.  Investing public should note these developments and be cautioned to deal with them.

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