Under the existing norms, an unsecured asset overdue beyond 90 days and a secured asset overdue beyond 180 days are treated as NPAs.
"NBFCs are a major source of funding for unorganised sector of the economy. The revised classification will eventually increase capital requirements of NBFCs and their cost of lending," said the Associated Chambers of Commerce and Industry of India (ASSOCHAM) in response to the draft recommendations of a Reserve Bank of India (RBI) Working Group.
It also suggested an enhanced time frame of five years to achieve the proposed Tier-I capital to risk weighted assets (CRAR) ratio of 12 per cent, instead of three years as proposed by the working group.
"NBFCs should be allowed to deploy surplus liquidity in government securities, treasury bills and money market with maturity beyond 30 days. For computing total financial assets, cash and bank deposits, such instruments may be deducted and treated as part of financial assets," said ASSOCHAM Secretary General D S Rawat.
On regulating loans to stock brokers and merchant bankers, it suggested that the status quo may be maintained, as the present restriction of a capital market exposure of 10 per cent of net worth by banks will restrict the ability of NBFCs to lend to this sector.
With respect to the proposed increase in the CRAR from 100 to 150 per cent for capital market exposure and 125 per cent on real estate exposure, the chamber said this will increase the cost of borrowing for NBFCs and will also be a deterrent for banks to lend to NBFCs.
Raising funds through the external commercial borrowings (ECB) route is currently prohibited for NBFCs. It should be allowed so that NBFCs have a window to raise funds at substantially lower rates of interest, he said.
Any further tightening may create systemic risk for the sector, he said. Rawat said no asset size ceiling should be insisted upon if the NBFCs are not accessing public funds.
Inter-corporate deposits may be excluded from the definition of public funds where the lending company has not received any public funds and both the lending as well as borrowing company belong to the same group, he suggested.
As the term business has not been defined, companies that are holding long-term investments in shares of group companies (and thus are merely investment companies) may not be considered as carrying on the business of NBFCs, he said.
To tackle the problem of bad assets and asset recovery, the RBI Working Group has proposed that NBFCs should be brought under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act.
The chamber said it is a bold step and NBFCs should be able to access the services of Debt Recovery Tribunals as well.
Existing non-deposit taking NBFCs having a net worth above Rs 500 crore and desirous of converting into deposit-taking NBFCs should be allowed to do so automatically with intimation to the RBI, the chamber said.
Also, assessing officers may be directed to issue nil tax deducted at source (TDS) certificates wherever the customer base exceeds 1,000 subject to the condition that the assessed pays an advance amount equal to the average of its tax paid in the last three years, it said.
NBFCs account for nearly 12 per cent of advances in the total financial system and can play a major role in furthering financial inclusion. There are 12,630 NBFCs registered with the RBI, providing credit delivery in asset financing and hire purchase.
In 2010-11 they delivered credit to the tune of Rs 4.62 lakh crore.