The Reserve Bank of India is expected to come out with comprehensive guidelines on the non-banking finance companies that are not involved in taking public deposits. This will form part of the RBI's mid-term review of the monetary and credit policy to be released on October 31.
The guidelines will shut the door on unfettered acquisition of NBFCs by foreign entities.
Foreign banks having or wanting to set up NBFCs for consumer finance are likely to be asked to choose between the banking and NBFC routes for their presence in India.
"Some foreign players who are not present in India are taking the NBFC route to make an entry. The existing players, too, are using this tool to expand their business, which they find difficult to do otherwise because the central bank is not very liberal in issuing branch licences. However, this practice cannot continue," said a banking source.
The RBI is concerned about the flow of foreign funds into the Indian financial market through non-deposit accepting NBFCs, which are not subjected to as rigorous a supervisory control as deposit-taking NBFCs.
The central bank is exploring ways to make it mandatory for foreign entities to seek the RBI's permission before going ahead with acquisitions of such non-deposit taking NBFCs.
There could also be a process of formal reporting to the RBI. Right now, foreign entities do not need an RBI nod for acquiring non-deposit taking NBFCs.
Recently, Temasek Holdings, the Singapore government's investment arm and one of the major investors in India, acquired Dove Finance, a Chennai-based NBFC.
Another Singapore-based bank, DBS, has also acquired a substantial stake in Cholamandalam Finance, which has subsequently been rechristened DBS Cholamandalam Finance.
French financial services major Societe Generale, in partnership with the Burmans of Dabur, also acquired a 75 per cent stake in Apeejay Finance, a subsidiary of Kolkata-based Apeejay Surendra Group.
Many more foreign players are planning to take the NBFC route to enter the Indian financial market as the regulator is not keen on opening up the banking sector.
