NBFC Directions, 1998
1. Important Directions applicable to NBFCs notified by RBI
- NBFCs Acceptance of Public Deposits (Reserve Bank) Directions, 1998
[AOPDRBD] [Notified on 31-1-1998]
- Non–Banking Financial Companies (Deposit Accepting or Holding)
Prudential Norms (Reserve Bank) Directions, 2007 [PN(D)RBD] [Notified on
22-2-2007]; and Non–Banking Financial Companies (Non-Deposit Accepting or
Holding) Prudential Norms (Reserve Bank) Directions, 2007 [PN(ND)RBD]
[Notified on 22-2-2007]
- Non–Banking Financial Companies Auditor's Report (Reserve Bank)
Directions, 2008 [ARRBD] [Notified on
18-9-2008]
2. Classification as an NBFC
The Reserve Bank of India has clarified that for a company to be classified
as an NBFC, to decide on its principal business, it will have to satisfy the two
tests of assets and income. The financial assets should be more than 50% of the
total assets (netted off by intangible assets) and the income from financial
assets should be more than 50% of the gross income. Both these tests need to be
satisfied for a company to be regarded as an NBFC.
3. Registration Requirement
An NBFC cannot commence/carry on its business without –
- Obtaining the certificate of registration from the RBI; and
- Having NOF of ₹25 lakhs (₹200 lakhs for companies applying for
registration after 21-4-1999).
4. Definition of "Public Deposits"
The definition of "Public Deposits" has been amended by the AOPDRBD to
provide for exclusion therefrom of the following items:
- Intercorporate deposits;
- Deposits from shareholders of a private Co. and from Directors of a
Limited Co. or from relative of a Director of the NBFC;
- Amount received on issue of Optionally Convertible Debentures;
- Amount received from promoters based on Financial Institution
stipulations.
It should be noted that the above four categories of deposits remain
restrictive deposits, and are hence, not exempt, during the period referred to
in 3(a) above.
5. Net Owned Fund (NOF) is defined in S. 45-IA of the Reserve Bank
of India Act, 1934 and includes
- Paid-up equity capital,
- Free reserves, and
- Paid-up preference share capital that is compulsorily convertible into
equity.
- From these items, one has to reduce,
- i accumulated balance of loss;
- ii deferred revenue expenditure;
- iii intangible assets; and,
- iv excess of 10% of paid-up capital and "free reserves" over:
- investment in shares of subsidiaries/group companies/ other NBFCs; and
- investment in debentures/bonds/loans and advances (including HP/Lease
Finance) made to subsidiaries/group Cos.
6. Deposit Acceptance Ceiling
- In order to ensure a measured movement towards
strengthening the financials of all deposit taking NBFCs, the NOF requirement is
increased to a minimum of ₹ 200 lakh in a gradual, non-disruptive and
non-discriminatory manner, the entitlement to hold/accept public deposits is
amended w.e.f.
17-6-2008 vide Notification No. DNBS. 199/CGM (PK) - 2008 as under:
- As a first step, NBFCs having minimum NOF of less than ₹ 200 lakh are
required to freeze their deposits at the level currently held by them.
- Further, Asset Finance Companies (AFC) having minimum investment grade
credit rating and CRAR of 12% are required to bring down public deposits to a
level that is 1.5 times their NOF while all other companies may bring down their
public deposits to a level as per table given below by March 31, 2009:
Category of NBFC |
Ceiling on public deposits prior to amendment |
Revised Ceiling on public deposits |
AFCs maintaining CRAR of 15% without credit rating and having NOF
more than
₹ 25 lakh but less than ₹ 200 lakh |
1.5 times of NOF or ₹10 crore whichever is less |
Equal to NOF |
AFCs with CRAR of 12% and having minimum investment grade credit
rating and having NOF more than ₹ 25 lakh but less than ₹ 200 lakh |
4 times of NOF |
1.5 times of NOF |
LCs/ICs with CRAR of and having minimum investment grade credit
rating and having NOF more than ₹ 25 lakh but less than ₹ 200 lakh |
15% 1.5 times of NOF |
Equal to NOF |
AFCs – Asset Finance Companies
LCs – Loan Companies
ICs – Investment Companies
CAR – Capital Adequacy Ratio
- (c) Those companies which are presently eligible to accept public deposits up
to a certain level, but have, for any reason, not accepted deposits up to that
level will be permitted to accept public deposits up to the revised ceiling
prescribed above.
- (d) Companies on attaining the NOF of ₹ 200 lakh are required to submit
statutory auditor's certificate certifying its NOF.
- (e) The NBFCs failing to achieve the prescribed ceiling within the stipulated
time period, are required to apply to the Reserve Bank for appropriate
dispensation in this regard which may be considered on case-to-case basis.
- Effective from April 24, 2004, NBFCs cannot accept
deposits from NRIs except deposits by debit to NRO account of NRI provided such
amount does not represent inward remittance or transfer from NRE/FCNR (B)
account. However, the existing NRI deposits can be renewed.
7. Compliance with Liquidity Norms
- NBFCs accepting/holding public deposits are required to
invest in unencumbered approved securities as a percentage of deposits accepted.
S. 45 IB of the RBI Act, 1934 provides for a percentage between 5% and 25% (as
may be notified from time to time by the RBI) of the deposits outstanding at the
close of the business of last day of the 2nd preceding quarter. A Quarterly
Return is required to be submitted by an NBFC within 15 days of the month
succeeding the quarter to which it relates.
As per Notification No. DFC.121/ED(G)-98 dated 31-1-1998 as amended from
time-to-time and last being Notification No. DNBS (PD).205 / CGM (PK)-2009 dated
13-2-2009, NBFCs are required to invest in India in unencumbered approved
securities, deposits or bonds valued at the price not exceeding the current
market price of such securities an amount which shall, at the close of business
on any day be not less than 15% of the Public Deposit with effect from 13-2-2009
in following manner:
- Not less than 10% in unencumbered approved securities
- Up to 5% in unencumbered (a) term deposits in any scheduled commercial
bank, Small Industries Bank (SIDBI) or National Bank for Agriculture and
Rural
Development (NABARD) or (b) bonds issued by SIDBI or NABARD
- Non–compliance with the liquidity requirements is liable
to penal interest on the shortfall @ 3% above the bank rate for delay of one
quarter and delay beyond that @ 5% above bank rate.
8. Ceiling on the rate of interest
The ceiling on the rate of interest is specified at 12.5% per annum w.e.f.
24th April, 2007. Prior to this, the ceiling on the rate of interest was 11%
w.e.f. 4-3-2003.
9. Payment of Brokerage
An NBFC can pay to any broker for deposits collected by or through him,
brokerage not in excess of the rate specified below:-
Particulars |
Brokerage |
Where a deposit is for a period not exceeding one year |
One per cent of such deposit |
Where a deposit is for a period exceeding one year but not exceeding
two years |
One and a quarter per cent (not per annum) of such deposit |
Where a deposit is for a period not exceeding two years |
One and a half per cent (not per annum) of such deposit |
10. Maturity period and pre-mature encashment
- The maturity period for public deposits is minimum
12 months and maximum 60 months.
- Premature encashment of or grant of loan against
deposits within 3 months not permitted except on death of depositor. Detailed
provisions are made for premature repayment of deposit including payment of no
interest, payment of interest at reduced rates, etc. Special provisions are made
for "Problem" NBFCs and "tiny" public deposits.
NBFC has to maintain a Debenture Redemption Reserve @ 50% of the Debentures
issued out of Public issue only.
11. Capital Adequacy Ratio (CAR)
A deposit taking NBFC is required to maintain a minimum capital ratio
consisting of Tier I and Tier II capital which is not less than 12% of its
aggregate risk weighted assets on balance sheet and of risk adjusted value of
off-balance sheet items.
Similarly, every systemically important non-deposit taking NBFC is required
to maintain, with effect from April 1, 2007, a minimum capital ratio consisting
of Tier I and Tier II capital which is not less than 10% of its aggregate risk
weighted assets on balance sheet and of risk adjusted value of off-balance sheet
items. The CAR requirement is to be increased to 12% by March 31, 2010 and to
15% by March 31, 2011.
Further, the total of Tier II capital, at any point of time, cannot exceed
100% of Tier I capital.
12(A) Concentration of Credit/Investment
Every deposit taking NBFC and every systemically important non-deposit taking
NBFC cannot
- Lend to
- Any single borrower exceeding 15% of its owned fund; and
- Any single group of borrowers exceeding 25% of its owned fund;
- Invest in
- The shares of another company exceeding 15% of its owned fund; and
- The shares of a single group of companies exceeding 25% of its owned
fund;
- lend and invest (loans/investments taken together) exceeding
- 25% of its owned fund to a single party; and
- 40% of its owned fund to a single group of parties.
An NBFC, classified as Asset Finance Company by the RBI, may in exceptional
circumstances, exceed the above ceilings on credit/investment concentration to a
single party or a single group of parties by 5 per cent of its owned fund, with
the approval of its Board.
12(B) Loans against security of single product – gold jewellery
- All NBFCs shall
- Maintain a Loan-to-Value (LTV) ratio not exceeding 60 per cent for loans
granted against the collateral of gold jewellery and
- Disclose in their balance sheet the percentage of such loans to their
total assets.
- NBFCs should not grant any advance against bullion / primary gold and
gold coins. NBFCs primarily engaged in lending against gold jewellery (such
loans comprising 50 per cent or more of their financial assets) shall
maintain a minimum Tier l capital of 12 per cent by April 1, 2014.
13. Corporate Governance
RBI has laid down corporate governance guidelines for NBFCs vide RBI/2012-13/25/
DNBS(PD) CC No. 288/13.10.001/2012-13 that specify constitution of Audit,
Nomination and Risk Management Committees and Disclosure & Transparencies. The
guidelines in respect of Connected Lending have not been made operational vide Circular
No. RBI/2007-2008/92/DNBS.PD/CC 104/03.10.042/2007-08 dated 11-7-2007.
The circular also recommends rotation of partners of the Statutory Auditors
firm every three years for companies with public deposits/ deposits of ₹ 50
crore and above.
14. Mortgage Guarantee Company
The Mortgage Guarantee Company has been specified as an NBFC vide Circular
DNBS/PD(MGC) C.C.111/03.11.001/2007-08 dated 15-1-2008 and the Regulatory
Framework for the same including Prudential Norms and Investment Norms has been
specified vide Notification DNBS(PD)MGC No.4/CGM (PK) – 2008 and
Notification DNBS(PD)MGC No. 5 /CGM (PK) - 2008 both dated 15-2-2008. The
details are contained in Circular No. RBI/2007-2008/238/DNBS/PD(MGC) C.C.
1/03.11.001/2007-08 dated 15-2-2008.
15. VideCircular No. RBI/2007-2008/258/DNBS (PD) CC. No.
8/SCRC/10.30.000/2007-2008 dated 5-3-2008, the Securitisation Companies and
Reconstruction Companies are required to:
- Furnish the position of Owned Funds in Quarterly Statements SCRC1 as
item No. 1; and
- Also furnish a copy of audited balance sheet along with the Directors
Report/Auditors Report every year within one month from the date of Annual
General Body Meeting, in which the audited results are adopted, starting
with the balance sheet as on March 31, 2008.
16. Financial Year and Periodic Returns
- An NBFC shall have its accounting year as the financial
year ending on 31st March every year. Every non-banking financial company shall
finalise its balance sheet within a period of
3 months from the date to which it pertains.
- Every NBFC is required to submit the following to RBI:
- Certificate from its Statutory Auditor that it is engaged in the
business of non-banking financial institution requiring it to hold a
Certificate of Registration under Section 45-IA of the RBI Act with
reference to its position as at March 31 latest by June 30, every year. Such
certificate to also indicate the asset/income pattern of the non-banking
financial company for making it eligible for classification as Asset Finance
Company, Investment Company or Loan Company.
- Monthly return on exposure to capital market by every NBFC including
RNBC with total assets of ₹100 crore
and above in Form NBS-6 within 7 days from end of the month.
- An NBFC accepting or holding public deposits is
required to submit the following to RBI:
- Annual Return of Deposits as per First Schedule to AOPDRBD within 6
months of the financial year.
- Half yearly return on prudential norms in Form NBS 2 within 3 months of
the end of half year.
- Quarterly return on liquid assets in Form NBS 3 within 15 days of end of
quarter.
- Quarterly Return in Form NBS-5 – Monetary and Supervisory Return by all
NBFCs holding public deposits of ₹20 crores and above.
- An NBFC not holding/accepting public deposits is
required to submit the following to RBI:
- Monthly return on important financial parameters by non deposit
accepting/holding NBFC having asset size of ₹100 crores and above within 7
days from end of the month.
- Quarterly return of basic information from non-deposit taking NBFCs with
asset size of Rs. 50 crores and above but less than ₹100 crores beginning
from quartered ended September 30, 2008, within one month from end of the
quarter.
- Annual statement of capital funds, risk asset ratio etc., as at end of
March every year in Form NBS-7 by every NBFC-SI-ND, i.e. Systemically
Important non-deposit accepting/holding NBFCs with asset size of ₹100
crores, within
3 months from the close of the financial year.
- Any of the following changes to be communicated within one month from
the occurrence:
- Address, telephone or fax number of registered/corporate office
- Names and residential addresses of the directors of the company
- Names and the official designations of its principal officers
- Names and office address of the auditors of the company
- Specimen signatures of the officers authorised to sign on behalf of the
company
17. Audit directions
The RBI has issued Notification No. DNBS. 201 /DG(VL)-2008 dated 18-9-2008
titled Non-Banking Financial Companies Auditor's Report (Reserve Bank)
Directions, 2008 (the New Audit Directions) which apply to every auditor of an
NBFC. The Non-Banking Financial Companies Auditor's Report (Reserve Bank)
Directions, 1998 has been repealed by the New Audit Directions. The main
provisions of the New Audit Directions are:
- Auditors to submit additional report to the Board of Directors on the
matters specified in paras 3 and 4 of the New Audit Directions.
- Where the statement regarding any of the items referred to in para 3, is
unfavourable or qualified, or in the opinion of the auditor the company has
not complied with the provisions of the RBI Act or the NBFC Regulations, it
shall be the obligation of the auditor to make a report containing the
details of such unfavourable or qualified statements and/or about the
non-compliance, as the case may be, in respect of the company to the
concerned Office of the RBI.
18. Exemptions for provisions of RBI Act, 1934 – Master Circular
Number DNBS.PD. CC.No. 282 /03. 02.004 / 2012-13 dated July 2, 2012.
The above master circular consolidates and updates all the instructions
contained in the notifications listed in the Appendix pertaining to exemption
from various provisions of RBI Act, 1934.
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