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RBI
to Regulate Bank Exposure to NBFCs
In
a bid to guard against diversion of bank funds to the stock market,
the Reserve Bank of India (RBI) which is the central bank,
is actively considering clamping down on the exposures banks have
to non-banking finance companies (NBFCs) that do not accept
deposits from the public.
The
RBI 's concern follows the recent increase in the activities of
such NBFCs and requests from a number of foreign and private sector
banks to set up non-deposit taking NBFCs. Unlike deposit-taking
NBFCs, where regulations have been tightened , there are virtually
no regulatory guidelines governing NBFCs that do not accept deposits
from the public. The RBI , is therefore, considering exercising
some control over these NBFCs by stipulating limits on banks regarding
the extent of their exposure to such NBFCs. Banks are currently
not allowed to lend more than 5% of their advances as at the end
of the previous financial year for stock market related activities.
Most banks are understood to be well within these limits. However,
it is feared their exposure to the capital market may be much
higher through the NBFC route. Apart from loans, banks have been
subscribing in a big way to commercial papers floated by NBFCs.
The RBI is unlikely to wait till the mid-term review of its Annual
Policy on October 25 for making public the new lending limit of
the banks to NBFCs.
Earlier,
RBI had expressed its concern over the issue that bank funds may
be diverted to the capital markets, fuelling a rise in stock prices.
The central bank is eager to end the practice of 'regulatory arbitrage'
under which some banks are trying to take advantage of the looser
regulatory norms governing NBFCs to engage in activities that
are currently out of bounds to them.
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Source:
Financial Express dated 10th October 2005
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