DripFin

DripFin means Drip Finance ala Drip Irrigation (i.e. small scientific value added productive measures)

Archive for Legislation

Higher CAR – RBI Draft Guidelines for NBFC’s ; WILL Impact MFI’s

Higher capital adequacy ratio (CAR) mooted by RBI in it draft guidelines for non-banking financial companies (NBFC), including microfinance institutions (MFI), will put the organisations under pressure to boost their capital requirements by half to 15% by April 2009. MFIs in the country are highly leveraged since they are dependent on borrowings. They could find it difficult to bring in additional capital to meet the norms.

The draft guidelines have increased CAR of systemically-important non-deposit-taking NBFCs from 10% to 12% immediately, and to 15% by April 1, 2009. This would limit the way the NBFCs leverage their capital. Some experts say that with a 15% CAR, MFIs can leverage only up to five times. 

The regulator’s concern was triggered because NBFCs raised short-term resources to fund their asset books.

So far, only deposit-taking NBFCs were subject to prudential regulations on income recognition, asset classification and provisioning capital adequacy, among others, while non-deposit-taking NBFCs were subject to minimal regulation. Most of the systemically-important NBFCs are those promoted by banks. There are 173 systemically-important non-deposit-taking NBFCs.

According to RBI, “In view of recent international developments, the risk associated with highly-leveraged borrowings and the reliance on short-term funds by some NBFCs, there have been concerns regarding the enhanced systemic risk associated with the activities of the entities.”

Non-deposit-taking NBFCs with an asset size of over Rs 100 crore would be considered NBFC-ND-SI, and a new regulatory framework involving prescription of capital adequacy and exposure norms for such NBFC-ND-SI was put in place from April 1, 2007. The companies were advised to maintain a minimum capital-to-risk weighted assets (CRAR) ratio of 10%.

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Microfinance Bill

The new microfinance law is underway, with the Union Cabinet on Friday clearing the bill despite an opposition from some official quarters citing lacunae in it. The bill will be tabled in the current session of Parliament.

The bill for microfinance will empower the National Bank for Rural and Agricultural Development (Nabard) to regulate the microfinance sector in India. While microfinance institutions, operating in the form of trusts, societies and co-operatives will now come under Nabard, non-bank finance companies have been kept out of the ambit. Significantly, the minimum capital required has been fixed at as low as Rs 1 lakh.

According to the bill, MFIs operating as co-operatives, trusts and societies need to register under the Microfinance Development Council (MDC), which will be a Nabard-promoted entity. It will permit MFIs to raise savings, but they will have to take specific approvals from the council after registration to be able to raise savings. The minimum capital requirement has been capped at Rs 1 lakh, with promoters of such MFIs having to contribute, at least, 50% of this amount.

Other provisions include the appointment of a microfinance ombudsman to cater to the redressal of grievances arising from the participants of the sector. This apart, it is likely that the microfinance development fund, announced in the last budget, may now be made the centralised recipient of the grants received by MFIs, mainly from overseas institutions.