It may be time to change the way UCBs and NBFCs raise retail deposits

Who will say that another blowout like PMC Bank will not make the Rs 5 lakh sum assured by DICGC as on date, less than adequate?
Last fortnight, the Reserve Bank of India (RBI) said that 99.2 per cent of the beleaguered CKP Co-op Bank’s 132,170 depositors will get full payment of their monies. This is mainly due to the fact that the payout by the Deposit Insurance and Credit Guarantee Corporation (DICGC) has been hiked to Rs 5 lakh from Rs 1 lakh.

Given the poor governance at urban co-operative banks (UCBs) in general, is it an opportune time to cap an individual’s deposits in them at Rs 5 lakh —equivalent to the sum assured by the DICGC in case of a bank’s collapse? And also, a relook at what may appear unrelated in the first instance — allowing more top-rated non-banking financial companies (NBFCs) to raise retail deposits (capped at the same level), albeit with DICGC comfort?

The UCB world

In the aftermath of the blowout at the Punjab and Maharashtra Co-operative Bank (PMC Bank) last year, the reports of the Y H Malegam Committee (2011) and R Gandhi Committee (2015) were re-read. Both reports had made a case for empowering depositors by giving them a say in the running of UCBs. 

While Gandhi’s report never touched upon the issue of a cap on individual depositors, it had observed: “The resolution regime for UCBs exists in a rudimentary form in as much as it ensures pay-outs to small depositors by DICGC while large depositors’ interests are not taken care of fully in the event of cancellation of the licence of a bank.”

It is pertinent to note that UCBs are getting to be larger. The RBI’s Report on Trend and Progress of Banking notes that UCBs with deposit bases between Rs 100 crore and Rs 250-crore became the modal class at the end of FY19; the up to Rs 10-crore bracket had formed the modal class in FY08. This suggests an increase in the average deposit per account over the decade as well as an expansion of the customer base of UCBs. Who will say that another blowout like PMC Bank will not make the Rs 5 lakh sum assured by DICGC as on date, less than adequate?

“I don’t think capping the size of the deposit placed by an individual at Rs 5 lakh in an UCB is the answer for the issues faced by such entities. You have to tackle asset-side and corporate governance concerns,” says Nilesh Sathe, former member of the Insurance Regulatory and Development Authority of India. 

Uday Joshi, national general secretary of Sahakar Bharati, is of the view: “Our demand is that there be a separate ceiling of Rs 20 lakh for institutional investors in UCBs as many other co-operative societies and small businesses also have deposits in these banks.” Coming from Joshi of Sahakar Bharati, an influential voluntary body among co-operatives in the country, this is the closest you can get on record on a deposit ceiling — two classes of depositors to start with.


What about NBFCs?

Two divergent trends can be seen among NBFCs. 

The collapse of Infrastructure Leasing & Financial Services (IL&FS) has affected resource mobilisation by non-deposit taking NBFCs (NBFCs-ND). Growth in credit availed by them from banks crashed to 20 per cent in Q2FY20 from nearly 70 per cent in Q1FY20; growth in market borrowings raised through commercial papers (CPs) and debentures remained flat at four per cent during the same period. This is despite the fact that IL&FS was a core-investment company (CIC); and not all NBFCs-ND are CICs.

It is different in the case of deposit-taking NBFCs (NBFCs-D) even after the meltdown of Dewan Housing Finance Corporation (DHFL) in the same space.  Mobilisation of deposits by these players progressed at a robust pace of 31.6 per cent in FY19 even though the number of companies authorised to accept deposits came down to 82 at end-September 2019 from 168 in FY18. And these entities have no DICGC cover at all!

It is surreal at one level. “The strategy adopted of limiting the operations and growth of NBFCs-D is driven by the need to secure depositors’ interest, given that deposits (NBFCs-D) are not covered by the DICGC,” says the RBI in its Trends and Progress report. The central bank has mandated that only investment grade NBFCs-D shall accept fixed deposits from the public, up to a limit of 1.5 times their net-owned funds for a tenure of 12 to 60 months, with interest rates capped at 12.5 per cent. What if there is a sudden fall in the key ratios of NBFCs-D, which have no DICGC cover?

“Top-rated NBFCs may be permitted to raise deposits of up to Rs 5 lakh from each retail depositor. There can be a cap as to what percentage this will form of the total liabilities of an NBFC,” notes Vimal Bhandari, executive vice-chairman and chief executive officer at Arka Fincap. “This will help NBFCs to have an additional stable source of funding rather than be entirely dependent on bank lines, debentures, and CPs,” he adds. Of course, with the backing of the DICGC.

What we now have is a peculiar situation — weak UCBs raising unlimited deposits with DICGC cover; NBFCs-D doing so with no such backing (what if another DHFL were to happen?); and NBFCs-ND heavily dependent on bank credit and money markets, gasping for air. And, the entire world coming to rescue depositors in Yes Bank, which according to the central bank, was a scheduled commercial bank — the most strictly policed of entities.

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