Minimise deposit mop-ups outside banking, says RBI

Fraudulent schemes of NBFCs are a concern

The Reserve Bank of India (RBI) Governor, D Subbarao has said that deposit taking should eventually be restricted only to banks which are tightly regulated and deposit collection by non-banking finance companies (NBFCs) should be gradually minimized and eventually eliminated.

Towards this endeavor, Subbarao said that the RBI has been quite restrictive in authorising NBFCs to collect deposits which caused the number of NBFCs — allowed to mop-up deposits — coming down from 1,420 in 1998 to less than a fifth (257) by 2013. Also, deposit-taking NBFCs now comprise only about 2 per cent of the total number of NBFCs registered with RBI, he pointed out.

Addressing an international banking summit organised by the Indian Merchants' Chamber here, the RBI Governor said that much of the fraud in the non-bank sector happens through unlawful and fraudulent schemes which should not be operating (in the first place), which reinforces the importance of surveillance and enforcement, especially by the state governments.

Regulatory jurisdiction

For the record, Subbarao made it clear that the "RBI’s regulatory jurisdiction in the non-bank sector is restricted to NBFCs that are defined as companies in which financial assets comprise more than half the total assets and income from those financial assets constitutes more than half the gross income."

Stating the RBI’s regulation of NBFC sector focuses on both financial stability and consumer protection, he said: "The focus on financial stability is important because many of these NBFCs borrow from banks and their failure will have a negative impact on the balance sheets of banks and eventually on financial stability." At the same time, he continued, the focus on consumer protection is important because thousands of low income households are lured into fraudulent financial schemes by the promise of unviably high rates of interest.

Although RBI does not have the explicit statutory mandate, he said it has traditionally been performing the role of ensuring financial stability and that the central bank is placed at a "comparative advantage" to oversee it.  However, he clarified that the RBI is not seeking an exclusive role in ensuring financial stability.

"On financial stability, there are a number of issues that we need to think through within existing laws," he said.