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Bigger capital adequacy ratio to hit cos
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 may 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.

“Many MFIs that are struggling to achieve economies of scale will find it difficult to meet capital adequacy norms. MFIs classified as NBFCs do not have access to deposits and, therefore, their capital is highly leveraged,” head of a prominent MFI-NBFC told ET. The regulator’s concern was triggered because NBFCs raised short-term resources to fund their asset books.

Representative from a private equity fund, a stakeholder in the MFI, said, “Strong MFIs with large capital bases will be able to meet the requirements. Equity infusion is not a problem for the MFIs because, if they were not strong enough, debt financing for the MFIs would have dried up.”

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%.
Source :
The Economic Times
 
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