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Capital adequacy ratio -- RBI probing NBFCs' arrangement with banks

Ashok Jainani

MUMBAI, Sept. 2

THE Reserve Bank of India is probing cases where banks have been helping non-banking finance companies (NBFCs) to meet the RBI stipulations on capital adequacy ratio (CAR) requirements only at the time of reporting and not maintaining the CAR throughout, RBI sources said.

These sources said that at least one Mumbai-based large NBFC has been using a circuitous route to maintain the CAR with the help of two banks, one nationalised and one private sector, alternatively. This was done by the NBFC mainly to avoid being noticed by the bank if it were to seek the same bank's help each quarter, RBI sources said.

The objective of the same was to show lesser exposure by the NBFC to its subsidiary company, which, in turn, helped the parent NBFC to shore up its CAR. According to the RBI guidelines on NBFCs, any investments/lendings to the subsidiary are deducted fro m the holding company's net worth which, in turn, determines the NBFC's net owned funds for the purpose of calculation of CAR.

This is how the modus operandi worked: A few days before the end of reporting quarter (say around last week of March, June and September), the NBFC's subsidiary company raised a temporary overdraft facility from the bank against security of collaterals. In order to show lesser exposure, the funds thus raised by the subsidiary were repaid to the parent NBFC.

The NBFC would, in turn, place the same amount as a short-term fixed deposit with the bank. This deposit was used as a security by the bank to advance temporary overdraft facility to the NBFC's subsidiary. In effect, the funds neither came in nor moved o ut of the bank, but helped the NBFC to show lesser exposure to its subsidiary and shore up its CAR ``artificially,'' RBI sources said.

Though technically, these NBFCs may be meeting the quarter-ending reporting requirements, it certainly defeats the RBI's very objective of stipulation to maintain the CAR throughout. ``Hence, to say that NBFCs have adopted a legal practice is questionabl e because NBFCs are supposed to maintain CAR throughout and not just at the time of reporting to RBI,'' banking sources said.