India’s central bank has tabled reforms to the funding practices of non-bank lenders in a move that some observers believe underlines its determination to limit the growth of a shadow-banking system.
Lending by non-banking financial companies has grown at an annual rate of around 28% over the last decade, while the banking sector’s assets have been expanding at about 17% a year since 2010.
That expansion, and how it is funded, seems to be causing concern, and in recent weeks the central bank has announced changes to how these companies can raise money by issuing bonds.
The Reserve Bank of India on June 27 said it would introduce a “minimum set of guidelines” for all private placements from financial companies, previously a popular source of funding for the sector.
Among other restrictions, the notice limits how many times a year these companies can issue privately placed bonds, and caps the number of investors in private placements to 49.
The backlash to the proposed rule change triggered an unusual climb-down, and the RBI withdrew the restriction on the frequency of private placements in a July 2 notice, promising a revision “in due course”.
Some local market participants, however, see the RBI’s recent interest in this alternative financial system as part of an ongoing effort to clean up the country’s financial sector and prevent the growth of a less-regulated shadow banking system.
In the new regulation for the non-bank lenders, the RBI clarified the definition of private placements, indicating that in certain instances financial companies have not made a clear distinction between private and public offerings.
It also said it would require every bond issued by a NBFC to be backed by equivalent loans.
Also, financial companies should not extend loans against the security of their own debentures either and all private bond placements should be fully secured.