RBI discourages public deposits for NBFCs as norms not at par with banks

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Amid industry calls to allow more NBFCs to accept public deposits, Reserve Bank of India Deputy Governor M Rajeshwar Rao said it is “indeed the non-acceptance of public deposits” by NBFCs which gives RBI the comfort to have lower entry barriers for NBFCs, allow them to specialise in a sector, and have lower exit barriers to wind up their business.

“Acceptance of deposit, in whatever manner and form, necessitates existence of a macro financial safety net, including deposit insurance and central bank liquidity backstop,” Rao said, adding that these safety nets come with increased regulatory rigour and intense supervisory oversight. He was speaking at the CII NBFC Summit 2024.

“NBFCs have evolved as niche companies serving a specific economic function and it is uncharacteristic for them to demand becoming like a bank, he said, adding that this is the reason that RBI’s approach has been to disincentivise deposit-taking NBFCs, the number of which has fallen to 26 in September 2023 from 241 in March 2014.

NBFC regulations vs banks

Despite popular opinion that regulations for upper layer NBFCs are at par with those for banks, Rao said that while regulations between banks and NBFCs have been harmonised by strengthening NBFC norms, significant differences continue to exist between the regulations.

“Regulations for NBFCs (especially in the upper layer) are much more calibrated and are certainly not on par with the regulations applicable to banks,” Rao said.

Minimum initial capital requirement for a universal bank is ₹1,000 crore compared with ₹10 crore for NBFCs. Further, the scrutiny for a banking licence applicant is “much more rigorous” than for NBFC applicants, primarily to reflect the access of public deposits through a bank license.

“It may perhaps be pertinent to mention here that RBI has provided certificate of registration to 447 NBFCs over last five years whereas no universal bank license has been given and only 2 small finance banks (SFBs) have been given licenses,” he said.

In addition, banks cannot engage in any activities other than those specified under the Banking Regulation Act, 1949. Banks also need deploy at least 40 per cent of the adjusted net bank credit, and small finance banks minimum 75 per cent, towards priority sector lending. However, there are no such requirements for NBFCs, including lack of guidelines on opening of branches.

On the argument that the regulatory capital requirement of NBFCs is higher at 15 per cent vis-à-vis 9 per cent for banks, Rao said it needs to be noted that banks’ capital requirement comprises credit, market and operational risk capital charges, whereas capital requirement for NBFCs is based only on credit risk capital charge. “Even components of regulatory capital are not as elaborately prescribed as is the case for banks,” he added.

RBI has not issued any certificate of registration to new NBFCs for acceptance of public deposits since 1997.