A report by the Reserve Bank of India's working group on development finance institutions (DFIs) has said institutions that the Centre does not support must convert themselves into either a bank or a non-banking finance company (NBFC). 
 
The group also said that state financial corporations should be phased out within a definite time frame. 
 
DFIs that convert into banks will not be granted any relaxation unless mandated by a statute in respect of minimum capital, income recognition, asset classification and provisioning, capital adequacy, maintenance of cash reserve ratio and statutory liquidity ratio, drawing of accounts and building of reserves, permissible banking business etc. 
 
And the special status conferred upon securities issued by public financial institutions should be done away with, the report added. 
 
Among the DFIs, the Industrial Development Bank of India is currently in the process of being converted into a bank under a special regulation issued by the government. The other institution, IFCI, is being merged with Punjab National Bank. 
 
The report said all new financial institutions should be set up as a company to be registered with the RBI like non-banking finance companies. 
 
They will be called development finance companies (DFCs) and will be fully regulated by the RBI. A net owned fund of Rs 100 crore (Rs 1 billion) has been recommended for the formation of such DFCs. 
 
The report added that a cap in terms of NOF may also be fixed for mobilisation of public deposits by residuary non-banking companies (RNBCs). 
 
To avoid hardship to existing RNBCs, the cap on public deposits may be fixed at a level of 16 times of NOF, as an initial measure along with a direction that the RNBCs will ultimately have to conform to the norms for raising of public deposits for NBFCs in general i.e. four times or 1.5 times of NOF as applicable. 
 
The time of such transition should preferably be not more than five years. 
 
DFCs accepting public deposits should maintain liquid assets as prescribed for other NBFCs. They should also be statutorily required to transfer certain proportion of annual profits to reserve funds. 
 
The RBI may fix suitable caps for RNBCs' exposures to capital market, real estate, unlisted but rated securities and units of equity oriented mutual funds. 
 
Keeping in view the conscious policy of moving away from the administered interests rate regime and also the prevalent interest rate, the floor limit on the rate of interest which can be offered by the RNBCs to the depositors may be removed. 
 
DFCs complying with the regulations will gain access to short- and medium-term resources, and the current rule of access to the extent of NOF may be done away with, the report said. 
 
Even though the non-public deposit taking companies are slated to be excluded from the purview of Financial Companies Regulations Bill 2000, the RBI should put in place, as an initial measure, a system of periodical collection of all information relevant to the systemic concerns pertaining to large sized non-public deposit taking companies with total assets of Rs 500 crore (Rs 5 billion) and above. 
 
This system may also be specified for public deposit taking companies to the extent required. The report also says that the RBI may divest its ownership stakes in Nabard and the National Housing Bank. 
 
The RBI may ensure that the standard of regulations or supervision exercised by the NHB, the Small Industries Development Bank of India and Nabard over the institutions falling under their respective domains are broadly on a par with that maintained by RBI.