The Reserve Bank of India’s Deputy Governor, M Rajeshwar Rao, explained that the reason some financial institutions called Non-Banking Financial Companies (NBFCs) don’t accept public deposits is what makes it easier for them to operate. He said that if NBFCs start accepting deposits from the public, it would require more rules and oversight, like deposit insurance and support from the central bank.
Rao spoke at the CII NBFC Summit 2024, emphasizing that NBFCs are unique businesses with specific economic roles. Unlike banks, they have specialized functions, and it’s not in their nature to act like banks. The RBI’s approach has been to discourage NBFCs from taking deposits, and the number of NBFCs accepting deposits has decreased from 241 in March 2014 to 26 in September 2023.
Rao highlighted the differences in regulations between banks and NBFCs. The initial capital required for a universal bank is ₹1,000 crore, while for NBFCs, it’s ₹10 crore. The process for getting a banking license is more thorough than for an NBFC, mainly because banks have access to public deposits. Over the past five years, the RBI has granted registration to 447 NBFCs, but no new universal bank licenses have been issued, and only two small finance banks (SFBs) have been licensed.
Banks have specific activities defined by the Banking Regulation Act, and they must allocate a certain percentage of their credit to priority sectors. These requirements do not apply to NBFCs, and there are no guidelines on the opening of branches for NBFCs.
Regarding the argument that NBFCs have a higher regulatory capital requirement (15%) compared to banks (9%), Rao explained that banks’ capital requirements are more comprehensive, covering credit, market, and operational risk, whereas NBFCs’ requirements are based only on credit risk. Additionally, the components of regulatory capital for NBFCs are not as detailed as those for banks. The RBI has not allowed new NBFCs to accept public deposits since 1997.
