The Modi government unleashed another blow at black money in India by listing 9491 non-banking financial companies (NBFCs) as “high-risk financial institutions”. It is imperative to note that these are 82% of the total NBFCs in India. Non-banking financial institutions are registered under the Companies Act as companies that engage in loans and advances and acquisition of various marketable securities. They differ from banks because they can neither accept demand deposits nor issue cheques.

Wrongdoings of the companies

The list was released on Monday, 26th February 2018 by the Financial Intelligence Unit, which operates under the Finance Ministry. The list states that these companies did not comply with the provisions of the Prevention of Money Laundering Act. According to the Act, it is required that all NBFCs appoint a principal officer to record and report suspicious cash transactions of amounts exceeding Rs 10 lakh to the FIU. These companies have not even registered themselves with the FIU and have further failed in maintaining and verifying records of their clients.

The names first appeared when the Enforcement Directorate alleged that they illegally converted Rs 500 and Rs 1000 notes during demonetisation. They did so by issuing back-dated cheques and FDs in exchange for deposits of cash, violating RBI’s clear instruction regarding the same.

Compounded by banks’ problems

The names include the large finance arms of conglomerates like Reliance, Shriram Group, and Tata. It also includes stock market favourites like Shalibhadra Finance Ltd. and Purushottam Investofin with their prices elevating by 120% last year and 322% in 2016, respectively.  In this context, “high-risk institutions’’ means that these companies bear the risk of being used for money-laundering purposes. In fact, it’s being suggested that some of these companies are shell companies. What is strange is that the Ministry would have had this data for years, but it chose to keep it under the wraps and release it during this turbulent phase in the banking sector. Moreover, a CRISIL report released that NBFCs are going to take a bigger bite in the credit pie at the cost of the non-performing assets raddled banking sector. The share of NBFCs in total credit is going to rise to 19% by 2020 from 12% in 2014. This projection takes into account improvement in public banks due to the government’s bank recapitalisation programme and a decent improvement in private banks.

This news could deeply impact the reputation of these NBFCs. These companies borrow from bigger NBFCs, banks and organisations like SIDBI (Small Industries Development Bank of India) and NABARD (National Bank for Agricultural and Rural Development). Their mention in the list could reduce their likeliness to obtain financing. It will also require them to provide more information and verification due to greater government vigilance.

A struggle ahead

No NBFC has denied the allegations yet. Even the RBI hasn’t released any official information about the listing. In fact, just three days before the list by the FIU came out, the RBI came up with the NBFC Ombudsman Scheme 2018. Under this, the RBI will appoint 4 Ombudsman in Delhi, Mumbai, Kolkata, and Chennai to address customer grievance against those NBFCs which accept deposits. This facility is proposed to be extended to other non-banking finance companies as well.

Banking sector’s woes are going to act in favour of non-banking financial institutions. However, with such news coming up even in this sector, India is going to have a hard time cleaning up its finance ecosystem.

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