The Hindu Business Line : Willing to wound, afraid to strike

THE Reserve Bank of India is not in a hurry to put in place an anonymous electronic screen based order matching trading system for government securities.

From day one brokers were against the idea ridding them of fat commissions. Dummy runs of the system had started.

Now the Mid-Term Review of Annual Policy Statement for 2004-05 says the Report of the Working Group, under the Chairmanship of Dr R.H. Patil, "is being placed in the public domain for wider dissemination." Can one take it that the brokers with their political contacts have won the day? If so it is unfortunate. If an order driven system can work for the equity markets, why can it not do for the money markets?

Seemingly, the RBI has not accepted the Report of the Working Group on Development Financial Institutions calling for a halt to the unlimited acceptance of deposits by Residuary Non-banking Companies (RNBCs). The report suggests linking deposit growth to net owned funds of the entities, a rule stipulated by RBI for other NBFCs. The two prominent RNBCs registered with RBI are Peerless General Finance & Investment Company Ltd and Sahara India Financial Corporation Ltd.

In June 2004, the RBI told the RNBCs to invest 90 per cent of their deposits in government securities. Further, rating and listing requirements for other approved instruments were prescribed.

Today, the credit policy has laid a roadmap for RNBCs which says: a) investments of RNBCs in CDs of FIs which have a minimum rating of AA+ at the time of investment will be reckoned as eligible securities as long as they have minimum investment grade rating; b) current account balances of RNBCs with commercial banks would be considered as eligible investments; c) the investments of RNBCs in bonds and debentures of companies which meet stipulated listing and rating requirements at the time of investment will be considered as ineligible investments if they migrate to below the investment grade rating.

To help depositors (the two RNBCs together have over Rs 15,000 crore as deposits), the RBI intends to focus on: 1) transparency of operations, especially in the connected lending relationships; 2) corporate governance standards including professionalisation of the boards and ensuring "fit and proper" criteria in consonance with the standards in banks; 3) avoiding untenable rates of commission to agents; 4) adherence to know your customer norms and 5) customer service in terms of clear indication of the identifiable contact with the field agents for matters such as unclaimed deposits are appropriately addressed.

Will all these prevent RNBCs from accepting more deposits at high interest rates? That precisely was the reason behind the Working Group trying to unwind their operations by tying up deposits to net owned funds.

In the last few months, the RBI has been trying to tighten shareholding norms for private banks and is not comfortable with their existence. The RBI has finalised a second draft on "Guidelines on Ownership and Governance" based on talks with various players and will be "put in public domain soon." Why then should RNBCs be treated rather softly?

More Stories on : Credit Policy | NBFCs | On Mint Street

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page