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Basic regulatory framework on NBFCs
Classification of NBFCs in terms of applicability of various regulations
Deposit taking NBFC
Prudential norms for NBFC-D
Corporate Governance norms
Other instructions applicable to all
NBFCs
Systemically Important Non Deposit taking
NBFC
Prudential norms for NBFC-ND-SI
Corporate Governance norms
Misc instructions for ND-SI
Other instructions applicable to all
NBFCs
Non Systemically Important Non Deposit
taking NBFC
Prudential norms for NBFC-ND-Non-
SI
Other instructions applicable to all
NBFCs
Applicability of prudential norms
Is it an NBFC?
Is it holding public deposits?
Is it having public funds?
Asset size < Rs. 500 crores?
Yes
Yes
No
Yes
No
Is it a company?
Asset size => Rs. 500 crores?
Non Banking Financial (Deposit Accepting or Holding) Prudential Norms (Reserve Bank) Directions, 2007 to
apply.
Non Systemically Important Non Banking Financial (Non Deposit Accepting or Holding) Prudential Norms
(Reserve Bank) Directions, 2015 to apply
Systemically Important Non Banking Financial (Non Deposit Accepting or Holding) Prudential Norms
(Reserve Bank) Directions, 2015 to apply
Only Clause 15 of Non Systemically Important Non Banking Financial (Non Deposit Accepting or Holding) Prudential Norms (Reserve Bank) Directions, 2015 to
apply
Yes
No
Yes
Yes
Both Income and Asset criteria to be satisfied
Matters to be checked for all NBFCs
Maintenance of minimum NOF
All NBFCs, irrespective of their date of existence are required to attain a minimum NOF of Rs. 2 crores. Presently the same was applicable for NBFCs registered with the RBI
from 21st April, 1999. For NBFCs in existence on before 21st April, 1999, the NOF had been
retained at Rs. 25 lakhs.
Existing NBFCs with NOF of less than 2 crores are required to submit a statutory auditor's certificate certifying compliance to the revised levels at the end of each of the two financial years as given in the adjacent table.
Minimum NOF of Rs. 200 lakh to be attained by the end of March 2017, as per the milestones given below: Rs. 100 lakh by the end of March 2016 Rs. 200 lakh by the end of March 2017
Clarification w.r.t. calculation of NOF
For calculation of NOF of an NBFC as per section 45-IA of the RBI Act, 1934 –
Investments in the companies in the same group are to be reduced from the Owned Funds of the Company –
The definition of “companies in the same group” has to be derived from section 370(1B) of the Companies Act, 1956
Aggregation of the total assets of NBFCs in a group in order to determine the
systemic importance of an NBFC
Aggregation of assets of Multiple NBFCs in the same group
Was a part of the 10th November, 2014 circular
Was dropped from the final notifications of 27th
March, 2015
Again re-instated in the Master Circular –Miscellaneous Instructions to all NBFCs
Multiple NBFCs in the same Group
For ascertaining asset size of NBFCs-ND-SI, the total assets ofNBFCs in a group (i.e. part of a corporate group or are floated bya common set of promoters), including NBFCs-D, if any, will beaggregated. That is, asset size will be clubbed as “group” level
Accordingly consolidation will fall within the asset sizes of the twocategories viz. NBFC-ND (with asset size of less than Rs, 500 crores); and NBFC-ND-SI (with asset size of Rs. 500 crore or more).
Regulations as applicable to the two categories will be applicable toeach of the NBFC-ND within the group, irrespective of itsindividual asset size.
For NBFC-D, all applicable regulations would apply.
‘Companies in the Group’ defined
The word “group” has a broad definition
“Companies in the Group”, shall mean an arrangement involving two or moreentities related to each other through any of the following relationships: Subsidiary – parent (defined in terms of AS 21),
Joint venture (defined in terms of AS 27),
Associate (defined in terms of AS 23),
Promoter - promotee [as provided in the SEBI (Acquisition of Shares and Takeover) Regulations,1997],
For listed companies, a related party (defined in terms of AS 18),
Common brand name, and
Investment in equity shares of 20% and above
The word “group” would take the definition of applicable AccountingStandards. Accounting standards define “group” to mean holding, subsidiary and fellow subsidiaries
Compliance checks for the NBFC-ND-Non SIs
Important provisions applicable to NBFC-ND-Non SI
Regulations with respect to Income Recognition, Asset Classification and Provisioning Requirements
Submission of a certificate from Statutory Auditors
Requirements with respect to maintenance of CRAR [only a few classes of companies]
Applicability of leverage ratio – 7 times
Provisions pertaining to lending against gold
Provisions pertaining to lending against shares
Credit concentration limits (only which are held by NOFHC)
Restrictions with respect to opening of branches
Norms for restructuring of advances
Provisions pertaining to flexible structuring of long term project loans to Infrastructure and Core Industries
Cannot be a partner of a firm/ LLP
Submission of Branch Info Return
For the purpose of “Framework for Revitalizing Distressed Assets in the Economy” –Notified NBFCs would mean those NBFCs having net assets of Rs. 100 crores or above
This would however include all NBFC Factors
Leverage restriction on NBFC – ND – Non SI
Leverage to be maintained at 7 times w.e.f. 27th March, 2015
Leverage =
Owned funds has been defined in the following manner –“owned fund” means paid up equity capital, preference shares which are compulsorily convertible into equity, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset, as reduced by accumulated loss balance, book value of intangible assets and deferred revenue expenditure, if any;
Outside Liabilities has been defined in the following manner –“outside liabilities” means total liabilities as appearing on the liabilities side of the balance sheet excluding 'paid up capital' and 'reserves and surplus', instruments compulsorily convertible into equity shares within a period not exceeding 5 years from the date of issue but including all forms of debt and obligations having the characteristics of debt, whether created by issue of hybrid instruments or otherwise, and value of guarantees issued, whether appearing on the balance sheet or not.
Outside LiabilitiesOwned Funds
Exemptions from the provisions of the Non SI regulations
These regulations, save and except Para 15 [Annual certification by Statutory Auditors] ,will not applicable to a Non SI not accepting/ holding public funds
These regulations, save and except para 26 [Information with respect to change of address, directors, auditors, etc. to be submitted to the RBI ]shall not be applicable to Government Companies not accepting/ holding public funds
These regulations shall not apply to a CIC, not being a CIC-SI
Para 15, 16 and 17 shall not apply to CIC SI
Para 8,9 and 17 shall not apply to MFIs
Definition of public funds
funds raised directly or indirectly through public deposits, commercial papers, debentures, inter-corporate deposits and bank finance but excludes funds raised by issue of instruments compulsorily convertible into equity shares within a period not exceeding 5 years from the date of issue
RBI’s FAQs on NBFCs clarifies “indirect receipts of public funds” to be –
indirect receipt of public funds means funds received not directly but through associates and group entities which have access to public funds.
Compliance checks for the NBFC-ND-SIs
Meaning of NBFC-ND-SI changed
Earlier non-deposit accepting NBFCs with asset size of Rs. 100 crores or more were classified as NBFC-ND-SI.
Henceforth, NBFCs-ND which have asset size of Rs. 500 crore and above as per the last audited balance sheet would be classified as NBFC-ND-SI for the purpose of administering prudential norms.
Rs 500 crores is a reasonably big size
Expectedly, a whole lot of companies will go out of complying with all or some of the prudential norms requirement
NBFC- ND SIDetails of requirements applicable 1/6
Income recognition requirements – Income to be recognised based on recognised accounting standards
Income on NPAs should be recognised on cash basis, any income recognised before the asset became NPA remaining unrealised shall be reversed
Income from dividend on shares and mutual funds shall be recognised on cash basis
Income from bonds and debentures of corporate bodies and from Government securities/ bonds may be recognised on accrual basis
Income from securities of corporate bodies or PSUs, the payment of interest of repayment of principal of which has been guaranteed by the Central Government or State Government, may be recognised on accrual basis
Details of requirements applicable 2/6
Accounting Standards – AS and Guidance Notes issued by the ICAI to be followed
Where the provisions of AS are inconsistent with the directions – Directions to prevail
Accounting of investments – The Board of Directors of every company to frame investment policy
It should contain the criteria to classify current and long term investments Classification of current and long term investments should be done at the time of making the
investment
The quoted investments should be group into certain classes, as specified in the Directions, for the purpose of valuation Quoted instruments to be valued at cost or market value, whichever is lower
Unquoted investments to be valued at cost or break up value, whichever is lower Unquoted preference shares, in the nature of current investments, shall be valued at
cost or face value, whichever is lower Investments in unquoted Govt. Securities or Govt. Guaranteed bonds shall be the carrying
cost. Unquoted units of mutual funds in the nature of current investments to be done based
on the NAV Commercial papers to be valued at the carrying cost Long term investments shall be valued in accordance with AS – 13, issued by the ICAI
Details of requirements applicable 3/6
Policy on Demand/ Call Loans Board of Directors to frame a policy on Demand/ Call Loans
Cut off date within which the repayment of demand or call loan shall be demanded or called up should be mentioned in the policy
Rate of interest to be charged should be laid down in the policy
Asset Classification – Standard Assets Sub-standard Assets Doubtful Assets Loss Assets
Provisioning requirements – Discussed earlier in this presentation
Disclosure in balance sheet – Provisions for bad and doubtful debts Provisions for depreciation in investments
Schedule to the balance sheet – Company to append to its balance sheet a schedule to be drawn in the format prescribed in
Annex 1 of the Directions
Details of requirements applicable 4/6
Submission of certificate from Statutory Auditor to the RBI –
Stating that it is engaged in the business non banking financial activity and holds the CoR under section 45-IA and is eligible to hold it
Indicating the asset/ income pattern of the Company for making it eligible for classification as Asset Finance Company, Investment Company or Loan Company
Within 1 month from the date of finalization of the Balance Sheet and in any case not later than 30th December of that year.
Details of requirements applicable 5/6
Capital Adequacy Requirements – CRAR of 15% (Applicable only to Non-SI, MFI & IFC)
Tier I should not be less than 10%, in case of an IFC
Tier II in case of NBFC – MFI should not exceed Tier I
Lending against gold – Separate set of directions governing gold lending
Information with respect to change of address, directors, auditors etc – The company to inform the RBI the following within 1 month from the date of
occurrence – the complete postal address, telephone number/s and fax number/s of the
registered/corporate office
the names and residential addresses of the directors of the company;
the names and the official designations of its principal officers;
the names and office address of the auditors of the company; and
the specimen signatures of the officers authorised to sign on behalf of the company
Details of requirements applicable 6/6
Norms for restructuring of advances –
As per the guidelines dated 23rd January, 2014
Submission of “Branch Info” Return –
All NBFCs having total assets of more than Rs. 50 crores to submit Branch Information on quarterly basis within 10 days from the expiry of relative quarter
Prudential Regulations for NBFCs-D and NBFCs-ND-SI
The following categories of asset classification has been provided: Determination of NPA for Lease Rental and Hire-Purchase Assets
Determination of NPA for other than Lease Rental and Hire-Purchase Assets
Determination of sub-standard asset for all loan and hire-purchase and lease assets
Determination of doubtful asset for all loan and hire-purchase and lease assets
For the existing loans, a one-time adjustment of the repayment schedule, which shall not amount to restructuring will, however, be permitted.
Change in provisioning norms – for standard assets
Revised to 0.40% for NBFCs-ND-SI and for all NBFCs-D;
Presently it is at 0.25% of the outstanding.
This change is in line with that of banks
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
Change in asset classification norms
Time period for treating an as asset to be NPA has been reduced to 3 months
The accounting cycle has to be adjusted in the following manner – For NPA -
5 months for FY 2015-16
4 months for FY 2016-17
3 months for FY 2018-19
For doubtful assets –
16 months for FY 2015-16
14 months for FY 2016-17
12 months from FY 2017-18
Changes in credit/ investment concentration norms
Credit/ investment concentration restriction:
Lending –
Single borrower – 15%
Single group of borrowers – 25%
Investing in shares –
Single party – 15%
Single group of parties – 25%
Lending to/ Investing in –
Single party – 25%
Single group of parties – 40%
Exposures in group companies, to the extent that the same has been reduced from owned funds to arrive at net owned funds, shall not be considered for the purpose of concentration norms
Changes in the capital adequacy requirement
Tier 1 capital requirement increases to 8.5% on 31st
March 2016, and 10% in 31st March 2017
Basel II or Basel III definitions are seemingly not being applied to NBFCs
Core Investment Companies
Core Investment Company
CIC defined as:
not less than 90% of their assets were in investments in shares, debt, loans in group companies for the purpose of holding stake in the investee companies
Atleast 60% in equity of group companies
not trading in these shares except for block sale (to dilute or divest holding)
not carrying on any other financial activities,
not holding / accepting public deposits
Overview of CIC
Regulatory framework for CICs-SI
Systemically important CIC
Company having asset not less than Rs. 100 crore
Either individually or with other group CICs
Which raises or holds public deposits Capital requirements Minimum Capital Ratio to be maintained at all times Adjusted Net Worth shall not be less than 30% of its
aggregate risk weighted assets on balance sheet and riskadjusted value of off balance sheet items as on the date ofthe last audited balance sheet.
Regulatory framework for CICs-SI
Leverage ratio The Outside liabilities of a CIC-ND-SI shall not exceed 2.5
times of its Adjusted Net Worth calculated as on the date of the last audited balance sheet;
Adjusted Net worth means- Aggregate of owned funds as appearing in the last balance
sheet: Increased /reduced by-
50% of unrealized appreciation /diminution in the book value of quoted investments
Increase /reduction, if any, in equity share capital
Submission of Annual Statutory Auditor’s Certificate by CIC-ND-SI Compliance of requirements of the directions Within one month from date of finalisation of balance sheet
Exemptions
CICs exempted from:
maintenance of statutory minimum NOF
requirements of Prudential norms for non-deposit accepting NBFC.
CICs-ND-SI required to submit an annual certificatefrom their statutory auditors regarding compliancewith the Directions
Regulations applicable to CICsWhether NBFC?
Principal business investments?
Qualifies to be a CIC?
Net assets >Rs. 100 crores?
Co has public funds?
Net assets >= 500 crores?
Non-Systemically Important Non Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015, except Clauses 15, 16, 17, will be applicable
Systemically Important Non Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015, except Clauses 15, 16, 24, will be applicable
The company is not required to obtain registration with the RBI and prudential norms will not be applicable
The company is not required to obtain registration with the RBI and prudential norms will not be applicable
It is an Investment Company and regulations applicable to such companies will become applicable
Yes
Yes
Yes
Yes
Yes
No
No
No
No
Acquisition/ Transfer of control over NBFCs
Definition of “control”
Meaning of control to be derived from SEBI (SAST) Regulations, 2011
As defined in SEBI (SAST) Regulations, 2011 –
“control” includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner
Change in control
Prior RBI approval required – Any takeover or acquisition of an NBFC, may or may not result in change
of management Any change in the shareholding of an NBFC, including progressive
increases over time, which would result in acquisition / transfer of shareholding of 26 per cent or more of the paid up equity capital of the NBFC prior approval not required in case shareholding goes beyond 26% due to
buyback of shares / reduction in capital where it has approval of a competent Court. The same is to be reported to the Bank not later than one month from its
occurrence;
Any change in the management of the NBFC which would result in change in more than 30 per cent of the directors, excluding independent directors.
Prior approval not required in case a directors gets re-elected on retirement by rotation
Change in control cont.
Whether transfer within the promoter group will also require prior approval?
Yes. Prior approval would be required in all cases of acquisition/ transfer of shareholding of 26 per cent or more of the paid up equity capital of an NBFC.
In case of intra-group transfers, NBFCs shall submit an application, on the company letter head, for obtaining prior approval of the Bank.
Based on the application of the NBFC, it would be decided, on a case to case basis, whether the NBFC requires to submit the prescribed documents.
This was clarified by way of FAQs.
Other requirements
Application should be made in the letter head of the Company with the following information – Information about the proposed directors / shareholders as per the Annex;
Sources of funds of the proposed shareholders acquiring the shares in the NBFC;
Declaration by the proposed directors / shareholders that they are not associated with any unincorporated body that is accepting deposits;
Declaration by the proposed directors / shareholders that they are not associated with any company, the application for Certificate of Registration (CoR) of which has been rejected by the Reserve Bank;
Declaration by the proposed directors / shareholders that there is no criminal case, including for offence under Section 138 of the Negotiable Instruments Act, against them; and
Bankers' Report on the proposed directors / shareholders.
A public notice of at least 30 days shall be given before effecting the transfer
Returns Purpose / Particulars Periodicity Due date
CTR - Cash
Transaction
Reporting
Individual transactions below rupees fifty
thousand may not be included. Cash
transaction reporting by branches/offices of
NBFCs to their Principal Officer should
invariably be submitted on monthly basis
(not on fortnightly basis) and the Principal
Officer, in turn, should ensure to submit CTR
for every month to FIU-IND within the
prescribed time schedule Monthly
15th of the
succeeding
month
STR -
Suspicious
Transaction
Reporting
The Principal Officer should record his reasons for treating any transaction or a series of transactions as suspicious.
within 7 days
of arriving at
a conclusion
that any
transaction are
of suspicious
nature
Fraud Reporting
Returns Purpose / Particulars Periodicity
Due date
FMR-1
Report on Actual or Suspected
Frauds in NBFCs
Within 3 weeks (i.e.
21 days ) from date of
detection
FMR-2 Report on fraud outstanding Quarterly
within 15 days of the
end of the quarter
FMR-3
Case-wise quarterly progress reports
on frauds involving Rs. 1 lakh and
above Quarterly
within 15 days of the
end of the quarter
Snapshot of applicability of various requirements to the different classes of NBFCs
NBFC-
ND with
no PF
NBFC-
ND with
PF
CIC CIC-SI
with
Asset
100 -
500 crs
CIC-SI
with
Assets >
500 crs
NBFC-
ND-SI
with PF
NBFC-
ND-SI
without
PF
Concentration
Norms
Not
Applicable
Not
Applicable
Not
Applicable
Not
Applicable
Not
Applicable
Applicable Applicable
Capital
Adequacy
Not
Applicable
Not
Applicable
Not
Applicable
Respective
Directions
Respective
Directions
Applicable Applicable
Provisioning
norms
Not
Applicable
Applicable Not
Applicable
Not
Applicable
Applicable Applicable Applicable
Asset
Classification
Not
Applicable
Applicable Not
Applicable
Not
Applicable
Applicable Applicable Applicable
Statutory
Auditor
Certificate
Applicable Applicable Not
Applicable
Applicable Applicable Applicable Applicable
Leverage Ratio Not
Applicable
7 times Not
Applicable
2.5 times 2.5 times Not
Applicable
Not
Applicable
Corporate
Governance
Norms
Not
Applicable
Not
Applicable
Not
Applicable
Not
Applicable
Not
Applicable
Applicable Applicable
NBFCs Auditors Report Directions
Matters to be reported for all NBFCs
Whether the company is engaged in the business of non-banking financial institution and whether it has obtained a Certificate of Registration (CoR) from the Bank
In the case of a company holding CoR issued by the Bank, whether that company is entitled to continue to hold such CoR in terms of its asset/income pattern as on March 31 of the applicable year.
Whether the NBFC has complied with the following – the provisions of Chapter III B of Reserve Bank of India Act, 1934 (Act 2 of 1934);
or the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve
Bank) Directions, 1998; or Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential
Norms (Reserve Bank) Directions, 2007; or Systemically Important Non-Banking Financial (Non-Deposit Accepting or
Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 and Non-Systemically Important Non-Banking Financial (Non-Deposit Accepting or
Whether BOD has passed a resolution for not accepting public deposits
Whether the NBFC has accepted any public deposit during the year
Whether the NBFC has complied with prudential norms
For NBFC-ND-SI- Whether the CRAR reported in NBS 7 has been calculated properly
and whether such ratio is in compliance with minimum CRAR
Whether the company has furnished to the Bank the annual statement of capital funds, risk assets/exposures and risk asset ratio (NBS-7) within the stipulated period
Draft Companies (Auditor’s Report) Order, 2016
Yet to come into force
Whether the same will be applicable to NBFCs once implemented?
The Order shall be applicable to all except the following classes of companies – Banking companies Insurance companies Section 8 company OPCs and Small Companies A private limited company, not being a subsidiary or holding of a public
company, having a paid up capital and reserves and surplus not more than rupees one crore as
at the balance sheet date and which does not have total borrowings exceeding rupees one crore from any
bank or financial institution at any point of time during the financial year and which does not have a total revenue as defined in Scheduled III to the
Companies Act, 2013 exceeding rupees ten crore during the financial year as per the financial statements.
Therefore, unless the NBFC satisfies any of the above conditions, it will be covered under the same
Matters that might be of relevance for NBFCs
Loans granted by NBFCs to companies, firms or other parties covered by clause (76) of Section 2 of the Companies Act, 2013. Whether the terms of the same are prejudicial to the interest of the company; Whether receipt of the principal and interest amount is paid on the such loans regularly; Where the overdue amount is more than Rs. 5 lakhs, whether the company has taken
necessary steps to recover the same.
In respect of loans, investments and guarantees by the NBFC, whether provisions of Section 185 and 186 of the Companies Act, 2013 have been complied with.
Whether the company has defaulted in repayment of dues to a financial institution or bank or debenture holders? If yes, the period and amount of default to be reported.
Whether the proceeds of the term loans/ public issue/ follow on offer have been utilised for the specified end use.
Whether the requirements under section 42 of the CA, 2013 have been complied with for issue shares and partly or fully convertible debentures under private placement or preferential allotment basis? Whether the proceeds have been utilised for the specified end use?
