More than two-thirds of non-banking finance companies (NBFCs) face closure if the Usha Thoratpanel recommendation on minimum asset size is implemented by the Reserve Bank of India, shutting a vital source of funding in many parts of the country.

Nearly 9,000 companies lending to borrowers in small towns and villages that lack banking facilities could be in danger of losing their licences as their asset size is less than Rs 25 crore.

"Around 70% of NBFCs could go out of business if the proposed requirement of Rs 25 crore of financial assets is accepted," said Mahesh Thakkar, director-general,Financial Industry Development Council, the representative body of the industry.

"There are many companies with asset size of Rs 5-10 crore that will be out of business," he said.

The RBI-constituted panel, headed by its former deputy governor Usha Thorat, to tighten rules for NBFCs has proposed that these companies should have minimum assets of Rs 25 crore. Thorat has also suggested that their minimum equity capital be raised to 10% of risk-weighted assets from 7.5%.

There are 12,371 registered NBFCs as of November 2012, RBI data shows.

There are 12,104 non-deposit taking NBFCs while 265 take deposits from retail investors.

Finance companies fill a key gap in the Indian financial system by lending to people who cannot meet the strict document and collateral norms set by banks.

Also, they serve in regions where the banking system has not reached even four decades after nationalisation. Although some of them charge usurious interest rates, their flexibility and the ease with which a borrower can get loans make them relevant to the system.

To reduce the risk to the financial system, the central bank has been tightening norms for finance companies that rely on funding from banks. More than half their funds come from banks, which are unable to reach the hinterlands.

Gold loan companies, which have been growing at a blistering pace in the past few years, have been restricted with a lower loans-to-value ratio.

"Two scenarios are possible," says Shinjini Kumar, director at consultants PriceWaterhouseCoopers. "Better regulation will create better opportunities, and NBFCs will adapt as they have done in the past and deliver. On the other hand, many of them may not find the business viable in the absence of the opportunity space between banks and borrowers, and shut shop."

The moment the central bank implements the minimum requirement clause, these companies may be covered by the various acts governing moneylenders that are inimical to the corporate way of functioning.

"There are 23 different moneylending Acts, which we will have to follow after we get deregistered," said Alok Sondhi, who has been running the Punjab Kashmir Finance Group for nearly half a century. "Around 85% of the asset finance companies will be de-regulated." (Economic Times)