The NBFCs in the proposed BL (base layer) and ML (middle layer) suffer at the moment due to the rigidity of credit rating templates used by rating agencies,” the FIDC wrote to the RBI on February 12 in a letter seen by FE.
In response to the Reserve Bank of India’s (RBI) discussion paper released on January 22, an association of non-banking financial companies (NBFCs) has asked for a “harmonised” regulatory framework with that of banks. The Finance Industry Development Council (FIDC) has made several demands, including a refinancing arrangement to reduce small and medium NBFCs’ reliance on the banking system and differential risk weights for various loan categories.
“An alternative mechanism for rating these entities may also be considered to ensure that all NBFCs do not get rated on the same parameters irrespective of size, complexity of business and the niches in which they operate. The NBFCs in the proposed BL (base layer) and ML (middle layer) suffer at present due to this rigidity of credit rating templates followed by the rating agencies,” the FIDC conveyed to the RBI in a letter dated February 12, a copy of which FE has seen.
The industry has requested the RBI to articulate a road map for NBFCs in the upper layer (NBFC-UL) to convert themselves into banks. It has sought greater flexibility on matters such as deposit acceptance, raising of funds through external commercial borrowings (ECBs) and setting up of subsidiaries overseas.
For NBFCs in the middle layer, FIDC has sought “a special focus on availability of funding”. These companies would fall primarily in the BBB to AA- category in terms of their external credit rating and they continue to face fundraising challenges, the letter said.
According to Umesh Revankar, MD & CEO of Shriram Transport Finance Company, one of the industry’s (not the FIDC’s) representations is a request to reduce the frequency of statutory auditor rotation. “One of the points is the requirement for statutory auditors to change every three years. It could be every five years, as we’ve suggested,” he said.
Girish Rawat, partner, L&L Partners, explained that currently, the Companies Act, 2013, lays down that prescribed companies are required to mandatorily rotate their auditor. An individual auditor cannot serve for more than one term of five years and an audit firm cannot serve for more than two terms of five consecutive years, with a cooling off period of five years. The RBI has proposed a uniform tenure of three consecutive years for auditors of NBFCs in the middle layer and above, with a cooling off period of six years.
According to some experts, regular changes in auditors may cause gaps in the audit process. The mandatory rotation of auditors, according to Prateek Bansal, associate partner at White & Brief Advocates and Solicitors, leads to greater compliance and procedures within NBFCs. “Now, the proposed rotation time frame of every three years is even more alarming,” he said, because the likelihood of faulty audits increases due to the short time period given to an auditor to become fully acquainted with a company’s system and operations. “The proposed time limit must be increased to at least five years, in accordance with Section 139 of the Companies Act, 2013, and the provisions of the Companies Act, 2013.”
