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Tarapore for sops to well-run NBFCs

Our Bureau

CHENNAI, June 23

THE former RBI Deputy Governor, Mr. S.S. Tarapore, today said that well-run non-banking finance companies should be provided strong incentives to become banks.

Mr. Tarapore said that the well-run NBFCs should work closely with the regulator/supervisor to develop strong self-regulatory organisations. He was delivering the inaugural lecture of the T.S. Santhanam Chair in Financial Economics at the Madras School o f Economics here.

``Ultimately, the regulatory/supervisory framework for banks and non-banks should converge and, in such a scenario, the well-run NBFCs should be provided strong incentives to become banks,'' he said.

When reserve requirements go down, the bank-non bank distinction will go, he said.

The T.S. Santhanam Chair was inaugurated by Mr. S. Viji, Vice-Chairman, Sundaram Finance Ltd.

Over time, the asset side controls on the residuary non-bank companies should gradually become applicable to all NBFCs and the RBI should devise special incentives for well-run NBFCs to become banks, Mr. Tarapore said. ``I am confident that some of the b est-run NBFCs could become the best-run banks in the country. If, after all, the FIs are to be given incentives upfront to converge, a similar treatment should be given to the strongly capitalised well-run NBFCs,'' he said.

Mr. Tarapore said that providing deposit insurance cover to the non-bank sector would be detrimental to the development of a strong financial sector as the stronger units would be subsidising the weaker ones. As at present, deposit insurance should remai n strictly restricted to banks.

He said regulation/supervision of NBFCs should continue to be under the aegis of the RBI. If needed, the staff could be augmented and the Board for Financial Supervision split into two, one for banks and the other for non-banks.

On the future of financial institutions (FIs), Mr. Tarapore said there must be an incentive/disincentive system and FIs should be given a clear outer time frame by which they would have to become banks. The FIs were far too big to be allowed to function outside the regulatory framework for banks, he said.

On tackling the NPA problem, he said that legal infirmities were by far the most formidable impediments to a strengthened banking system. The Andhyarujina Committee had recommended the creation of a new law granting statutory power of possession and sale of security directly to banks and FIs and creation of a new securitisation act which would confer legal sanctity to transfer of future receivables. Action on this front would be the most important measure in second-generation reforms, he said.

Referring to weak banks, Mr. Tarapore said the proposed Financial Restructuring Authority should be set up as part of the RBI infrastructure rather than create a new institution, which could result in a predictable turf war. Also, the weak banks, instead of going in for ambitious VRS programmes, should aim to reduce their staff by 6 per cent per annum as opposed to the natural attrition rate of 3 per cent per annum through retirements.

Whatever the strategy, it would take the weak banks at least a decade to reconstruct their balance sheets and it was totally unrealistic to expect a turnaround in a year or two, he said.