RBI tightens takeover rules for shadow banking

A worker cleans the stairs of the Reserve Bank of India (RBI) building in Kolkata December 18, 2013.

BY SUVASHREE CHOUDHURY-Mon Mar 30, 2015

(Reuters) - The Reserve Bank of India plans tougher rules for takeovers involving non-banking financial companies (NBFCs), according to a draft guideline published on Monday, outlining a demand that all substantial deals seek its prior approval.

In its latest effort to boost transparency and strengthen its grip on the alternative lenders that account for a large part of India’s shadow-banking sector, the RBI said any purchase of a stake of 26 percent or more in a company, or a change in more than 30 percent of its directors, would need the central bank’s permission.

"The RBI has been continuously trying to strengthen this sector so that this should not be a back yard for people we don’t know," said Sanjay Agarwal, managing director of Au Financiers (India) Ltd, an NBFC from western state of Rajasthan.

There are some 12,000 NBFCs registered with the RBI, and they largely offer loans. Some, like traditional banks, also take deposits.

The RBI also said in its circular that the source of funds behind new investors in any NBFC will have to be disclosed.

It also asked for an undertaking that new proposed investors are not associated with any existing but unregistered body that accepts public deposits.

NBFCs play a critical role in extending credit to areas where traditional finance cannot reach in a country where only just over half of the population has access to the mainstream banking system.

However, controlling these NBFCs has been made a key priority for the RBI, given their size and reach.

"Checks and balances always increase transparency. It seems like more of a preventive measure from RBI’s side," said a analyst tracking the NBFC sector at a domestic brokerage.

For the full release, see: bit.ly/1BWnghr

(Additional reporting by Abhishek Voshnoi; Editing by Clara Ferreira Marques and Greg Mahlich)