Proposed Guidelines- NBFC Sector

(RBI Press Release : 2012-2013/987 Dated 12-12-2012)

ICAI - DELHI

CA BHAVESH VORA

Reserve Bank of India has published the draft guidelines for NBFCs which are extensive in Nature mainly focusing on following aspects

Conditional Exemptions From Registration Revision in Prudential Norms Asset Classification – NPA Criteria for New Entrants as NBFCs Deposit Taking NBFCs Liquidity Management Corporate Governance

Introduction

CA Bhavesh Vora

Exempted Granted Registered

- Total assets Below Rs. 25 crores whether or not accessing public funds

- Deposit Taking NBFCs are always to be registered

- Total assets upto Rs. 500 Crores and not accessing public funds

RBI has right to inspect and right to frame rules in future.

- Above Rs. 25 Crores and accessing public funds (Directly or Indirectly)

Conditional Exemptions From Registration

“Public funds“ shall include funds raised either 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 10 years from the date of issue.

CA Bhavesh Vora

Tier I capital requirement has been raised from 7.5% to 12% for captive NBFCs, and NBFCs which invests or lend in sensitive sectors such as Capital Market, Commodities or Real Estate Sector (Implemented in phased manner – 3 years)

For other NBFCs, risk weights for Capital Market exposure and Real Estate exposure has been raised to 150% and 125% respectively

Revision in Prudential Norms

Impact: In both of the above cases, NBFCs will have to reduce their dependence on Tier II capital and will have to infuse more of permanent capital in the business in the form of Capital Infusion, Compulsory Convertible Debentures, etc…

CA Bhavesh Vora

NPA Provisions similar to Bank◦ Assets will become NPA if overdue for 90 days

instead of 180 days criteria at present◦ The same will be implemented in phased manner

Provision on Standard Asset increased to 0.40% from present requirement of 0.25%

Asset Classification - NPA

Impact: This will affect profitability of NBFCs because of higher provisioning against NPAs and provision against Standard Assets.

CA Bhavesh Vora

Existing Deposit Taking NBFCs should be credit rated

Unrated NBFCs will be given 1 year time to get rated

Acceptance of Deposits for Rated Asset Finance Companies – Reduced to 2.5 times of Net owned Funds (NOF) as against present limit of 4 times of NOF

Deposit Taking NBFCs

CA Bhavesh Vora

Minimum Asset size to be Rs. 25 Crores Fulfill 75% Financial Assets and 75%

Income from Financial assets Criteria Net Owned Funds requirements

continues to be Rs. 2 crores For FINANCIAL ENTITIES having asset

size Rs. 1000 Crores or more, need to register if Financial Assets OR Income from Financial Assets exceeds 50%

Criteria for New Entrants as NBFCs

CA Bhavesh Vora

Need to approach RBI afresh for CoR if ◦ Asset Size exceeds Rs. 25 crores and company

desires to access public funds◦ Asset size Exceeds Rs. 500 Crores even if no

public funds are accessed Notes:

◦ Assets of All NBFCs in single group will be aggregated for checking applicability of revised regulations

◦ Existing captive NBFCs will need to raise Tier I capital in phased manner (3 years)

Position of Existing NBFCs

CA Bhavesh Vora

Surrender or Enhance Asset Size Having total assets below Rs. 25 crores –

Required to notify RBI within 3 months from date of notification with a roadmap to increase the asset size to Rs. 25 crores (2 years period allowed to achieve the same)

Revised Principal Business criteria to be fulfilled in phased manner (75% instead of 50%)

If no plan to go above Rs. 25 crores asset size, surrender CoR and get de-registered

Position of Existing NBFCs…Cont

CA Bhavesh Vora

All registered NBFCs (Whether deposit taking or non deposit taking) should maintain high quality liquid assets, equal to the gap between Expected cash outflows and inflows in the 1 to 30 days bucket.

Quality liquid assets includes cash, bank deposits available within 30 days, money market instruments maturing within 30 days, actively traded debt securities with ratings

Liquidity Management

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Prior approval from RBI – For change in control and shareholding of more than 25%

Clause 49 to be followed by NBFCs having asset size Rs. 1000 Crores or more

Disclosure Norms in balance sheet has been enhanced to cover any registration under SEBI, IRDA, FMC, etc and penalties charged by those regulators

Remuneration and compensation committee for NBFCs with asset size above Rs. 1000 crores

Corporate Governance

CA Bhavesh Vora

Norms Affecting Directors and Directorships Prior approval for appointment of CEO – for

NBFCs having assets Rs. 1000 crores and above Cap on directorship of director of any NBFCs,

public or private, to be in line with Section 275 of Companies Act, 1956

All NBFCs-ND-SI and NBFC-D shall have a policy in place for ascertaining fit & proper criteria for appointment of directors and shall certify annually to RBI about fit and proper status of the Directors

Corporate Governance…Cont

CA Bhavesh Vora

Fit and proper person declaration to be given by Directors including ◦ list of relatives, associated entities connected or

interested in any other NBFCs◦ Fund and non-fund based facility presently

availed by Director himself or by his relatives or associated concerns from any NBFCs

Corporate Governance…Cont

CA Bhavesh Vora

Proposed Guidelines- NBFC Sector

(RBI Press Release : 2012-2013/987 Dated 12-12-2012)

ICAI - DELHI

CA BHAVESH VORA