Non-Banking Financial Companies (NBFCs) Final

7/25/2019 Non-Banking Financial Companies (NBFCs) Final

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Non-Banking Financial Companies

(NBFCs)

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What are NBFCs?

NBFCs are financial intermediaries engaged primarily in the

business of accepting deposits and delivering credit

Clause (b) of !ection "#-$ of Chapter $$$B of %B$ &ct' *"

defines an NBFC as+

(i) a financial institution' ,hich is a company

(ii) a non-banking financial institution' ,hich is a companyand ,hich has as its principal business the receiving of

deposits under any scheme or arrangement or in any other

manner or lending in any manner

(iii) such other non-banking institutions or class of such

institutions' as %B$ may ,ith previous approval of central

govt may specify

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What are NBFCs?

& Non-Banking Financial Company (NBFC) is a company

registered under Companies &ct' # engaged in the business

of loans and advances' ac.uisition of

shares/stocks/bonds/debentures/securities issued by 0ovt or

local authority or other marketable securities of a like nature'

leasing' hire-purchase' insurance business' chit business butdoes not include any institution ,hose principal business is

that of agriculture activity' industrial activity' purchase or sale

of any goods (other than securities) or providing any services

and sale/purchase/construction of immovable property

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1ypes of NBFCs

1hey are classified as+

&sset Finance Company + $t means a company ,hich is a

financial institution carrying on as its principal business the

financing of physical assets supporting productions/economic

activities such as automobiles' tractors' lathe machines'

generator sets etc2 $nvestment Company+ & company that is a financial institution

carrying on as its principal business' the ac.uisition of

securities

* 3oan Company+ & company that is a financial institution,hose principal business is providing finance' ,hether by

making loans or advances or other,ise for any activity other

than its o,n but does not include an asset finance company

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" $nfrastructure Finance Company ($FC)+ $FC is a non-banking

finance company

a) ,hich deploys at least 4#5 of its total assets in infrastructureloans'

b) has a minimum Net 6,ned Funds of %s *77 crore'

c) has a minimum credit rating of 8& 8or e.uivalent

d) and a C%&% of #5

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# !ystemically $mportant Core $nvestment Company (C$C-N9-

!$)+$t is an NBFC carrying on business of ac.uisition of shares

: securities ,hich satisfies the follo,ing conditions+-

(a) it holds not less than 75 of its 1otal &ssets in the form of

investment in e.uity shares' preference shares' debt or loans in

group companies;

(b) its investments in e.uity shares (including instruments

compulsorily convertible into e.uity shares ,ithin a period not

e


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(d) it does not carry on any other financial activity referred to in

!ection "#$(c) and "#$(f) of the %B$ act' *" e


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$nfrastructure 9ebt Fund+ $tis a company registered as NBFC to

facilitate flo, of long term debt into infrastructure pro>ects $t

raises resources through issue of %upee or 9ollar denominated

bonds of minimum # year maturity 6nly $nfrastructure FinanceCompanies ($FC) can sponsor $9F-NBFCs

4 Non-Banking Financial Company - icro Finance $nstitution

(NBFC-F$):$t is a non-deposit taking NBFC having not less

than @#5 of its assets in the nature of .ualifying assets ,hich

satisfy the follo,ing criteria+

a loan disbursed by an NBFC-F$ to a borro,er ,ith a rural

household annual income not e


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c total indebtedness of borro,er does not e


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@ Non-Banking Financial Company A Factors (NBFC-

Factors)+$t is a non-deposit taking NBFC engaged in the

principal business of factoring

Financial assets in factoring business should constitute at

least 4#5 of its total assets and its income derived from

factoring business should not be less than 4#5 of its grossincome

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%esiduary Non-Banking Company (%NBC)+ & non-banking

institution ,hich is a company and has principal business of

receiving deposits under any scheme or arrangement in one

lump sum or in installments by ,ay of contributions or in any

other manner' is also a NBFC (%esiduary non-banking

company)

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%B$ 0uidelines on NBFCs

Compulsory %egistration+ 1he %B$ (&mendment) &ct' 4'

provides for compulsory registration ,ith %B$ of all NBFCs

Net ,orth+ ntry point norm of %s 2 cr as the minimum net

o,ned funds from &pril 2'

aintenance of li.uid assets+ $nvest in approved securities an

amount not less than #5 but not less e


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# Ceiling on .uantum of public deposits+

3oan : $nvestment Cos - # times of N6F if the companyhas N6F of %s 2# lacs and minimum investment grade creditrating ($0) and complies ,ith all prudential norms

With $0 credit rating and 2 5 C%&% A " times of N6F

Without $0 credit rating but C%&% #5 or above- # timesof N6F' or %s 7 cr ,hichever' is less

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$nvestment in li.uid assets+

NBFCs- #5 of outstanding public deposit liabilities onthe last ,orking day of the second preceding .uarter' of

,hich

(i) not less than 7 5 in approved securities

(ii) not more than # 5 in term deposits ,ith banks

%NBCsA 75 of outstanding deposits

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4 eriod of deposits+ No demand deposits

NBFCs-2 to 7 months

%NBCs-2 to @" months

Chit funds- to * months

@ Ceiling on deposit rate

NBFCs' NFCs' and Nidhis -2#5 pa (effective Nov

' 277)

%NBCs A inimum interest of "5 on daily deposits and

5 on others

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&dvertisement : methodology for acceptance of deposits

9eposit acceptance form should contain certain

prescribed information' company to issue receipt for

deposits and maintain a deposit register

7 !ubmission of %eturns

&ll NBFCs have to submit periodic returns to %B$ at

.uarterly' half-yearly and annual intervals

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rudential Norms for NBFC! A&pril *

6n %ecommendations of Narasimham Committee and !hahCommittee %B$ has prescribed follo,ing prudential norms for

NBFCs

$ncome %ecognition

$ncome including interest/discount or any other charge on

N&s should be recogni=ed only ,hen it is actually reali=ed&ny such income recogni=ed before the asset became N& andremaining unreali=ed should be reversed

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Basis of identifying N& is the follo,ing Assets:$n respect of ,hich interest has remained overdue

for si< months

Term loans: $nclusive of unpaid interest ,hen the

installment/interest is overdue for months

Other current assets+ 1his refers to interest in respect of

debt/income on receivables that remain overdue for

months

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Demand/Call loan+ 3oans that remained overdue for months or on ,hich interest remained overdue for months

Bills+ Bills that remain overdue for months

Lease Rentals/Hire-Purchase Installment+

$nstallments that have been overdue for 2 months

$ncome from $nvestment+ $ncome from dividends tobe accounted on cash basis $nterest income frombonds on accrual basis

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Accounting Standards &ll &ccounting !tandards and0uidance Notes issued by $C&$ must be follo,ed

Accounting for Investments+ NBFC should frame an$nvestment olicy and the criteria to classify investmentsinto current and long term should be spelt out in the

policy

1he depreciation' if any' in each scrip should be fullyprovided for and appreciation' if any' ignored

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Duoted Current $nvestments

1hese should for valuation purpose be grouped into i)e.uity shares ii) preference shares iii) debentures iv) govtsecurities v) units of mutual funds vi) others

1hese investments in each category should be valued atcost or market value ,hich ever is lo,er 9epreciation foreach category of investment should be charged to : 3

&/C

3ong term $nvestments: 1hese should be valued inaccordance ,ith $C&$

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3. Asset Classification

NBFCs are re.uired to classify their assets into four broad groups+

i) !tandard &ssets+ & standard asset is one ,ith respect to ,hich nodefault in repayment of principal or payment of interest is perceived

ii) !ub-!tandard assets+ $t is one that has been classified as N& for aperiod not e


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rovisioning of loans and advances Loans, advances & other credit acilities includin! "ills

#urchased and discounted:3oss &ssets

1he entire asset should be ,ritten off

Dou"tul Assets

a) 775 provision should be made to the e


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b) $n addition' depending upon period for ,hich asset hasremained doubtful' provision to the e


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Capital &de.uacy+ 1o maintain a minimum capital ratio of

1ier-$ and 1ier-$$ capital e.uivalent to 25 of aggregaterisk ,eighted assets

1otal 1ier $$ capital should not e


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3oans against o,n shares+ NBFCs are prohibited fromlending against their o,n shares

# Concentration of credit/investments

NBFCs cannot lend to any single borro,er or single

group of borro,ers in e


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%isk Weighted assets means ,eighted aggregate of assets 9egree ofcredit risk' e


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&sset 3iability anagement

1he %B$ guidelines relate to interest and li.uidity risks

management systems in NBFCs ,hich form part of &3

function

1he &3 process rests on * pillars+ &3 $nformation !ystems

anagement $nformation !ystems

$nformation availability' accuracy' ade.uacy and

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&3 6rgani=ation !tructure and %esponsibilities

3evel of top anagement involvement

&3 rocess %isk parameters

%isk identification

%isk measurement

%isk management %isk policies and tolerance levels

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Non-Banking Financial Companies (NBFCs) Final

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