India’s central bank has scrapped the licenses of nearly 400 NBFCs so far this year

• As of August 2018, the RBI revoked the licences of nearly 400 non-banking finance companies owing to their failure to meet capital requirements.
  
• NBFCs need to have a minimum “net-owned fund” of ₹20 million for the purposes of extending loans.
  
• As of March 2018, there were around 11,402 NBFCs registered with the RBI. With the latest cancellations, that total is now a little below 11,000.

The purge is in full swing. The Reserve Bank of India (RBI)has made an aggressive push in the recent past to clean up the overcrowded non-banking finance sector.

As of August 2018, the central bank had reportedly scrapped the licences of nearly 400 non-banking finance companies (NBFCs) owing to their failure to meet capital requirements, while another 80 institutions surrendered their licenses voluntarily. In the first six months of 2018 alone, the licences of 368 NBFCs were cancelled.

NBFCs are credit institutions that are unable to accept demand deposits and issue cheques, hence keeping them out of the purview of regular banking laws. As per the RBI’s regulations, which were implemented in January 2017, NBFCs need to have a minimum “net-owned fund” of ₹20 million for the purposes of extending loans. The institutions that have had their licenses revoked were unable to satisfy this basic requirement.

Despite the requirements coming into force in early 2017, the RBI only started taking action against NBFCs this year after giving them some time to raise adequate funds. The minimum fund requirement is meant to ensure the capital strength of these institutions, lest they face a spate of defaults and are forced into insolvency.

The cancellations are unlikely to make a huge dent in India’s lending landscape. As of March 2018, there were around 11,402 NBFCs registered with the RBI. With the latest cancellations, that total is now a little below 11,000.

The clean-up is set to continue in the coming months. NBFCs have registered a strong level of lending growth in the last few years, raising concerns about the quality of their balance sheets. As per the RBI’s latest Financial Stability Report, NBFCs registered a 21% rise in loans and advances in 2017-18, following a 15% growth the previous year.