FINANCE COMPANIES

Summary

Delivered as the A. D. Shroff Memorial Annual Public Lecture in Mumbai on 29 August 1996 and published by the A. D. Shroff Memorial Trust later that year, Dr. A. C. Shah’s address surveys the rise of India’s non-banking finance companies (NBFCs) in the wake of the 1991 reforms and asks what kind of regulatory architecture would let them play a useful role alongside the banking system. Shah, a former Chairman and Managing Director of Bank of Baroda who also chaired the RBI Study Group on NBFCs (1992), opens with a tribute to A. D. Shroff’s ‘extra-ordinary moral courage and bold vision (arsh-Dristi)’ in resisting the socialist consensus of the fifties, and announces that the lecture will move through three parts: the current scenario, the regulatory framework, and an approach to problems.

In the ‘Current Scenario’ section the lecture documents the sector’s phenomenal expansion — from 7,063 companies in 1981 to 39,454 in 1995 — and explains why NBFCs have outgrown the banks at the margin: tailor-made services, lower regulatory weight, simpler sanction procedures, and marginally higher deposit rates that attract small savers. Shah quotes RBI Governor C. Rangarajan on the rising importance of leasing companies, and draws on Lester Chandler’s ‘Economics of Money and Banking’ to frame NBFCs as the ‘outer fringe of the organised financial sector’, whose growth reflects functional inter-penetration, the global integration of markets, and the spread of financial technology. He notes that of the 745 NBFCs with net-owned funds above Rs. 50 lakhs registered with RBI, fewer than 100 really qualify as major players.

The ‘Regulatory Framework’ section — which the rendered pages cover through printed p. 15 — summarises the regime that Shah’s own Study Group put in place from 1993 onwards. He defends the new architecture’s three basic objectives (orderly growth of NBFCs, depositor protection, and the efficacy of monetary and credit policy), the dismantling of the nine-category classification in favour of uniform regulation, the revised definition of Net Owned Funds, capital adequacy raised to 8 per cent, prudential norms on liquidity, single-party exposure, brokerage caps and credit-rating requirements, the new asset-classification and provisioning matrix, compulsory half-yearly returns to RBI, an enlarged role for auditors, and the creation of a High-Powered Supervisory Board with an expert group under P. N. Khanna to design its supervisory framework. Shah is careful to argue that regulators ‘have to resist the temptations of over-regulation which would stifle the growth of NBFCs’, and at the close of section II calls for an industry-wide Self Regulatory Organisation alongside the RBI’s continuing oversight, warning that ‘any permissiveness would cost the system dearly in terms of credibility and soundness.’

The rendered pages stop just as Shah begins his third section on ‘An Approach to Problems’; the remainder of the booklet (about eighteen further pages) is not seen here.

Key points

• The lecture is the 1996 A. D. Shroff Memorial Annual Public Lecture, delivered by Dr. A. C. Shah — former Chairman and Managing Director of Bank of Baroda and Chairman of the RBI Study Group on NBFCs.

• Shah frames his subject in three parts: (a) The Current Scenario, (b) The Regulatory Framework, and (c) An Approach to Problems; the rendered pages cover (a) and most of (b).

• Indian NBFCs grew from 7,063 in 1981 to 39,454 in 1995 (a compound rate of 14% p.a.); 745 have net-owned funds above Rs. 50 lakhs and are registered with RBI, but fewer than 100 qualify as major players.

• Shah attributes NBFC growth to tailor-made services, lower regulatory weight, simpler sanction processes, marginally higher deposit rates, and global trends of functional inter-penetration and integration of markets.

• The 1992 Study Group (chaired by Shah) recommended dismantling the nine-category classification, applying uniform regulation, revising Net Owned Funds, raising capital adequacy to 8%, and imposing prudential norms on liquidity, single-party exposure, brokerage and credit rating.

• Shah explicitly warns regulators against over-regulation that would stifle the sector, and proposes an industry-wide Self Regulatory Organisation alongside the new High-Powered Supervisory Board.

• Pull-quoted authorities include RBI Governor C. Rangarajan on leasing companies and the monetary theorist Lester Chandler on the erosion of bank monopolies through functional diversification.

• Only 225 of 745 registered NBFCs have complied with the half-yearly returns requirement — a compliance gap Shah flags as a matter of concern.