Mulayam govt plans to tackle NBFCs

LUCKNOW: Concerned over the increase in financial frauds in Uttar Pradesh, the Mulayam government is now contemplating to bring a legislation to regulate and control affairs of non-banking financial companies, popularly known as chit fund companies, thriving all over the state.
Over the last few years, over 6,000 fly-by-night NBFCs duped thousands of depositors of crores of rupees.In Lucknow alone, over 25 major chit fund companies made away with over Rs 100 crore. Scores of FIRs were lodged against the absconding owners but none of them have so far been arrested or money recovered from them.
To check repeat of cases like Uplease or Century in UP, the state government has taken the issue seriously. It has sought a list of NBFCs operating in UP from the Reserve Bank of India (RBI), the controlling authority of NBFCs. The information provided by RBI caused a flutter in the administration as over 1,000 NBFCs were still operating all over UP as private banks without completing the mandatory RBI formalities and obtaining a licence.
Although the RBI is the controlling authority of all financial institutions in the state it neither has adequate manpower nor arms to put an effective check on fake NBFCs operating in every nook and corner of the state. "We are left with no choice but to begin the process of drafting a state legislation to keep a tab on their functioning," a senior bureaucrat told TOI. Maharashtra, Haryana and Andhra Pradesh already have such Acts in their states.
Under the new NBFC Act, the state plans to include both preventive and punitive provisions. Erring directors will now find it difficult to escape the laws as their trial would be conducted by a designated court and would face life imprisonment, if convicted.
The new Act would give ample powers to the DMs and SSPs for scrutiny/verification of documents of NBFC applicants as well speedy prosecution of those who commit fraud. "Licences would be issued only after thorough scrutiny. District authorities will have ample powers to regulate, control, seize property and freeze bank accounts of erring NBFCs under the new Act," claims the bureaucrat.
The state government has sought opinion from the law department to give a go-ahead to the proposed legislation. "We are awaiting clearance from the law department to draft the Cabinet note," says the bureaucrat.
Taking no chances, the state is also writing to the Centre for making necessary amendments into the RBI Act 1934 (Act II of 1934) to delegate some powers to the state government for regulating affairs of NBFCs and guarantee safety to depositors.