NBFCs ask RBI for refinance facility to reduce dependence on banks

An association of non-banking financial companies (NBFCs) has sought a “harmonised” regulatory framework with that of banks in response to the discussion paper issued by the Reserve Bank of India (RBI) on January 22. Among the requests made by the Finance Industry Development Council (FIDC) is that of a refinancing arrangement to reduce the dependence of small and medium NBFCs on the banking system and differential risk weights for different loan categories.

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“An alternative mechanism for rating these entities may also be considered to ensure that all NBFCs do not get rated on the same parameters irrespective of size, complexity of business and the niches in which they operate. The NBFCs in the proposed BL (base layer) and ML (middle layer) suffer at present due to this rigidity of credit rating templates followed by the rating agencies,” the FIDC conveyed to the RBI in a letter dated February 12, a copy of which FE has seen.

The industry has requested the RBI to articulate a road map for NBFCs in the upper layer (NBFC-UL) to convert themselves into banks. It has sought greater flexibility on matters such as deposit acceptance, raising of funds through external commercial borrowings (ECBs) and setting up of subsidiaries overseas.

For NBFCs in the middle layer, FIDC has sought “a special focus on availability of funding”. These companies would fall primarily in the BBB to AA- category in terms of their external credit rating and they continue to face fundraising challenges, the letter said.

Umesh Revankar, MD & CEO, Shriram Transport Finance Company, told FE that among the representations made by the industry (not by the FIDC) is also a request to reduce the frequency of rotation of statutory auditors. “One of the points is that of the frequent changes required in statutory auditors every three years. We have suggested that it can be every five years,” he said.

Girish Rawat, partner, L&L Partners, explained that currently, the Companies Act, 2013, lays down that prescribed companies are required to mandatorily rotate their auditor. An individual auditor cannot serve for more than one term of five years and an audit firm cannot serve for more than two terms of five consecutive years, with a cooling off period of five years. The RBI has proposed a uniform tenure of three consecutive years for auditors of NBFCs in the middle layer and above, with a cooling off period of six years.

Some experts are of the view that the frequent change in auditors could leave gaps in the audit process. Prateek Bansal, associate partner, White & Brief Advocates and Solicitors, said that the mandatory rotation of auditors leads to increased compliances and processes within the NBFCs. “Now, the proposed time frame of rotation after every three years is further alarming as the likelihood of faulty audits increases due to the short time period allowed to an auditor to become fully acquainted with the system and operations of a company,” he said. “The proposed time limit must be increased to at least five years, which will also be in line with the provisions of Section 139 of the Companies Act, 2013.”