Non-Banking Finance Company (NBFC) is a financial institution which does not meet the legal definition of bank but carries the similar activities to that of bank like lending and making investments. However, all NBFCs are required to obtain a Certificate of Registration (COR) from the Bank to commence/carry on business of Non-Banking Financial Institution (NBFI) in terms of Section 45-IA of the RBI Act, 1934.
Certain changes to the regulatory framework for NBFCs has now been made by the Reserve Bank of India (RBI) vide notification No. DNBR (PD) CC.No.002/03.10.001/2014-15 dated November 10, 2014.
Mandatory Requirements of Minimum Net Owned Fund by NBFC
In terms of Section 45-IA of the RBI Act, 1934, no NBFC can commence or carry on business of a non-banking financial institution without having a Net Owned Funds (NOF) of ₹ 25 lakhs.
Thereafter, the requirement of NOF has been increased to ₹ 200 lakhs for all new companies w.e.f. April 21, 1999 vide RBI Notification No. DNBS.132/CGM(VSNM)-99 dated April 21, 1999.
But now all NBFCs are compulsorily required to attain a minimum Net Owned Fund of ₹ 2 crore by the end of March 2017, as per the milestones given below:
- ₹ 1 crore by the end of March 2016
- ₹ 2 crore by the end of March 2017
Consequently, the companies that were already in existence even before April 21, 1999 have to attain the above minimum NOF in addition to the new companies applying for grant of COR to commence business of an NBFC on and after November 10, 2014.
In other words, it shall be mandatory for all NBFCs to attain a minimum NOF of ₹ 100 lakh by the end of March 2016 and ₹ 200 lakh by the end of March 2017.
Note that all NBFCs, the NOF of which currently falls below ₹ 200 lakh shall submit a statutory auditor’s certificate certifying compliance to the revised levels at the end of each of the two financial years as given above.
If any NBFC fails to achieve the prescribed ceiling within the stipulated time period, the Bank will initiate the process for cancellation of COR against such NBFCs.
NBFCs gets Rated to Accept or Renew Public Deposits
In accordance with the revised regulatory framework for NBFCs, all unrated Asset Finance Company (AFC) have to get an investment grade by March 31, 2016 otherwise they will not be allowed to renew existing or accept fresh deposits thereafter. Moreover, the limit for acceptance of deposits for rated AFCs has also been reduced from 4 times to 1.5 times of NOF.
Meanwhile i.e. till March 31, 2016, the unrated AFCs or those with a sub-investment grade rating can only renew existing deposits on maturity but not allowed to accept fresh deposits till they obtain an investment grade rating.
Earlier to this amendment, the unrated AFC having NOF of ₹ 25 lakh or more and maintaining capital adequacy ratio of not less than 15% were allowed to accept or renew public deposits 1.5 times of its NOF subject to ₹ 10 crore as per extant NBFCs Acceptance of Public Deposit (Reserve Bank) Directions, 1998.
Threshold for Defining Systemic Significance for NBFCs-ND
In the light of the overall increase in the growth of the NBFC sector, the threshold for defining systemic significance for NBFCs-ND (non-deposit taking NBFCs) has been revised. Accordingly, the NBFCs-ND-SI will henceforth be those NBFCs-ND which have asset size of ₹ 500 crore and above as per the last audited balance sheet.
Thus, the NBFCs-ND shall now be categorized into two broad categories in accordance with the revised threshold limit for systemic significance:
A) NBFCs-ND (those with assets of less than ₹ 500 crore) and
B) NBFCs-ND-SI (those with assets of ₹ 500 crore and above).
Before the above amendments, the NBFCs were categorized into 3 groups for the purpose of administering prudential regulations viz. NBFCs-D, NBFCs-ND with assets less than ₹ 100 crore and NBFCs-ND-SI with assets ₹ 100 crore and above.
Total Assets of NBFCs in a Group or Multiple NBFCs
NBFCs that are part of a corporate group or are floated by a common set of promoters will not be viewed on a standalone basis. The total assets of NBFCs in a group including deposit taking NBFCs, if any, will be aggregated to determine if such consolidation falls within the asset sizes of the above two categories i.e. NBFCs-ND and NBFCs-ND-SI. For this purpose, Statutory Auditors would be required to certify the asset size of all the NBFCs in the Group.
Prudential Norms for NBFCs
Enhanced prudential regulations shall be made applicable to NBFCs wherever public funds are accepted and conduct of business regulations will be made applicable wherever customer interface is involved.
The term Public Funds includes:
a) Funds raised directly or indirectly through public deposits;
b) Commercial papers;
d) Inter-corporate deposits; and
e) Bank finance.
However, the term Public Funds does not includes funds raised by issue of instruments compulsorily convertible into equity shares within a period not exceeding 5 years from the date of issue.
NBFCs-ND Regulatory Approach (Asset size < ₹500 Crore):
The regulatory approach in respect of NBFCs-ND with an asset size of less than ₹ 500 crore will be as under:
(i) No Regulations for No Deposits and No Customer Interface: They shall not be subjected to any regulation either prudential or conduct of business regulations if they have not accessed any public funds and do not have a customer interface.
(ii) Conduct of business regulations if have Customer Interface: Those having customer interface will be subjected only to conduct of business regulations if they are not accessing public funds.
(iii) Prudential Regulations for Public Deposits: Those accepting public funds will be subjected to only limited prudential regulations if they have no customer interface.
(iv) Both Regulations for Deposits and Customer Interface: Where both public funds are accepted and customer interface exist, such companies will be subjected both to limited prudential regulations and conduct of business regulations.
(v) Compulsory Compliance of Sec. 45-IA: Irrespective of whichever category the NBFC falls in, registration under Section 45 IA of the RBI Act will be mandatory.
NBFCs-ND Regulatory Approach (Asset size ≥ ₹500 Crore):
All NBFCs-ND with assets of ₹ 500 crore and above shall have to comply with prudential regulations as applicable to NBFCs-ND-SI even if they have not accessed public funds.
However, the NBFCs-ND having assets size of ₹ 500 crore and more shall comply with conduct of business regulations only if customer interface exists.
Prudential Regulations for NBFCs-ND (Assets size < ₹500 crore):
The NBFCs-ND with asset size of less than ₹ 500 crore shall be:
A) Exempted from the requirement of maintaining CRAR;
B) Exempted from complying with Credit Concentration Norms; and
C) Maintain a leverage ratio (Total Outside Liabilities/ Owned Funds) of 7 to link Asset Growth with the Capital.
Prudential Regulations for NBFCs-ND-SI (Asset size ≥ ₹500 Crore) and all NBFCs-D:
Tier 1 Capital: All NBFCs-ND which have an asset size of ₹ 500 crore and above and all NBFCs-D shall maintain minimum Tier 1 Capital of 10%. The compliance to the revised Tier 1 capital will be phased in as follows:
- 8.5% by end of March 2016.
- 10% by end of March 2017.
Asset Classification: In the interest of harmonisation, the asset classification norms for NBFCs-ND-SI and NBFCs-D are being brought in line with that of banks, in a phased manner, as given below.
1) Non-Performing Asset (NPA)
A) Lease Rental and Hire-Purchase Assets:
i) Overdue for 9 Months as on 31st March 2016: Lease Rental and Hire-Purchase Assets shall become NPA if they become overdue for 9 months (currently 12 months) for the financial year ending March 31, 2016;
ii) Overdue for 6 Months as on 31st March 2017: Lease Rental and Hire-Purchase Assets shall become NPA if overdue for 6 months for the financial year ending March 31, 2017; and
iii) Overdue for 3 Months as on 31st March 2018 and Onwards: Lease Rental and Hire-Purchase Assets shall become NPA if overdue for 3 months for the financial year ending March 31, 2018 and thereafter.
B) Assets other than Lease Rental and Hire-Purchase Assets:
i) Overdue for 5 Months as on 31st March 2016: Assets other than Lease Rental and Hire-Purchase Assets shall become NPA if they become overdue for 5 months for the financial year ending March 31, 2016;
ii) Overdue for 4 Months as on 31st March 2017: Assets other than Lease Rental and Hire-Purchase Assets shall become NPA if overdue for 4 months for the financial year ending March 31, 2017; and
iii) Overdue for 3 Months as on 31st March 2018 and Onwards: Assets other than Lease Rental and Hire-Purchase Assets shall become NPA if overdue for 3 months for the financial year ending March 31, 2018 and thereafter.
2) Sub-Standard Assets
For all loan and hire-purchase and lease assets, sub-standard asset would mean:
i) NPA upto 16 Months on 31/03/2016: An asset that has been classified as NPA for a period not exceeding 16 months (currently 18 months) for the financial year ending March 31, 2016;
ii) NPA upto 14 Months on 31/03/2017: An asset that has been classified as NPA for a period not exceeding 14 months for the financial year ending March 31, 2017; and
iii) NPA upto 12 Months on 31/03/2018: An asset that has been classified as NPA for a period not exceeding 12 months for the financial year ending March 31, 2018 and thereafter.
3) Doubtful Asset
For all loan and hire-purchase and lease assets, doubtful asset would mean:
i) Sub-Standard Asset for 16 Months on March 31, 2016: An asset that has remained sub-standard for a period exceeding 16 months (currently 18 months) for the financial year ending March 31, 2016;
ii) Sub-Standard Asset for 14 Months on March 31, 2017: An asset that has remained sub-standard for a period exceeding 14 months for the financial year ending March 31, 2017; and
iii) Sub-Standard Asset for 12 Months on March 31, 2018 and thereafter: An asset that has remained sub-standard for a period exceeding 12 months for the financial year ending March 31, 2018 and thereafter.
4) Provisioning for Standard Assets
The provision for standard assets for NBFCs-ND-SI and for all NBFCs-D has now been increased to 0.40% (at present 0.25%). The compliance to the revised norm will be phased in as given below:
- 0.30% by the end of March 2016
- 0.35% by the end of March 2017
- 0.40% by the end of March 2018
Additional Requirements Applicable to all NBFCs-D and NBFCs-ND-SI
The following additional requirements are being put in place, which shall be applicable to all NBFCs-ND-SI, as also all NBFCs-D, with effect from March 31, 2015.
i) NBFCs shall ensure that there is a policy put in place for ascertaining the fit and proper criteria at the time of appointment of Directors and on a continuing basis.
ii) A declaration and undertaking shall be obtained from the Directors by the NBFC.
iii) The Directors shall sign a Deed of Covenant.
iv) NBFCs shall furnish to RBI a quarterly statement within 15 days of the close of the quarter on change of Directors certified by the auditors and a certificate from the Managing Director that fit and proper criteria in selection of directors have been followed.
All NBFCs-ND-SI and all NBFCs-D shall additionally disclose the following in their Annual Financial Statements with effect from March 31, 2015:
i) Registration/ licence/ authorisation obtained from other financial sector regulators;
ii) Ratings assigned by credit rating agencies and migration of ratings during the year;
iii) Penalties, if any, levied by any regulator;
iv) Information viz., area, country of operation and joint venture partners with regard to Joint Ventures and Overseas Subsidiaries; and
v) Asset liability profile, extent of financing of parent company products, NPAs and movement of NPAs, details of all off-balance sheet exposures, structured products issued by them as also securitization/ assignment transactions and other disclosures.
The revised regulatory provisions relating to NBFCs as discussed above shall be applicable to NBFCs-MFI also except wherever in conflict with the provision of Non-Banking Financial Company- Micro Finance Institutions (Reserve Bank) Directions, 2011, in which case the Directions ibid will be followed.
Note that the provisions of these Directions shall be in addition to, and not in derogation of the provisions of any other law, rules, regulations or directions, for the time being in force.