NBFCs: govt's timely warning

NBFCs: govt's timely warning

The government's decision to declare 9,491 non-banking finance companies (NBFC) as belonging to the high-risk category may have been prompted by the discovery of a Rs 13,000 crore fraud in Punjab National Bank and the recent focus on the huge NPA (non-performing assets) burden of nationalised banks. Over 82% of the NBFCs registered with the Reserve Bank of India (RBI) have been covered by the order of the finance ministry's economic intelligence unit. The warning was issued as these institutions failed to comply with the provisions of the Prevention of Money Laundering Act (PMLA). Under the Act, all NBFCs have to appoint an officer who should report to the government all suspicious transactions and all cash transactions of over Rs 10 lakh. Companies that flouted these rules have been declared high-risk. They include some well-known companies that belong to big business houses like Reliance and the Adani Group and others which have seen high growth in the last few years.  

It should be noted that the nature of risk is different for the public sector banks and the NBFCs. The risk involved in fraud, malpractices and other violations of the law in the PSBs will mainly hit the banks themselves, and most individual customers may not be directly affected. But in the case of the NBFCs, any wrongdoing will directly hit the customers as there is no government shield for them. Given the size and diversity of the sector, its failure to comply with the provisions of the PMLA will affect the financial system, too. So, the alert was much needed and timely. Many of these financial firms are active in the areas of loans, mutual funds, wealth management, etc., and problems in their functioning could have wide-ranging impact. It is expected that their role and share in the economy will grow further, with credit outgo from these institutions set to increase from 16% to 19% of all formal credit by 2020.  

The declaration does not mean that all the NBFCs have suddenly become highly risky to deal with. It highlights a technical non-compliance and is basically aimed at ensuring that the NBFCs make arrangements for regular reporting of dubious transactions. They should not only take the steps for that but also make them public so that the customers are reassured of the safety of their investments and the legal status and financial health of the NBFCs they are dealing with. The government announcement should also be seen in the light of the launch of the ombudsman scheme for NBFCs by the RBI last week for redressal of customers' grievances. The scheme, which covers all deposit-taking NBFCs, should be given wider publicity.

Liked the story?

  • 0

    Happy
  • 0

    Amused
  • 0

    Sad
  • 0

    Frustrated
  • 0

    Angry