Meaning of NBFC’s and Recent changes in law relating to NBFC’s

 Meaning of NBFC

Section 45I of the Reserve Bank of India Act, 1934 defines ‘non-banking financial company’ as–

• a financial institution which is a company;
• a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;
• such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify;

In short

• NBFC may be defined as a company registered under the Companies Act, 1956.
• Which provides banking services without meeting the legal definition of bank such as holding a banking license?
• NBFC are basically engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business.
• But does not include any institution whose principle business is that of agricultural activity or any industrial activity or sale, purchase or construction of immovable property.

[Trading in shares & securities in capital market is also falls under the definition of the NBFC, and as a results required prior registration as a NBFC]

Type of NBFC

• Equipment leasing company;
• Hire-purchase company;
• Loan company;
• Investment company;
• Infrastructure finance company.

After reclassification circular dated 06.12.2006, following categories of NBFCs have emerged;

• Assets finance company
• Loan company;
• Investment company;

Investment Company has been further divided in two categories

• Core Investment companies;
• Other company

Further Classification of NBFCs which is Non deposit taking (NBFC –ND)   based on the Size of its Asset:

• Systematic Investment NBFC-ND with assets size of more than 500 Cr. and;
• Non- Systematic Investment NBFC-ND with assets size of less than 500Cr

As per revised guidance, assets size of all the NBFC’s in the group is to be taken for the purpose of calculating assets size of NBFC, and if assets size of all the NBFC’s in a group exceeds 500 crore then guideline in respect of Systematically important Non Banking financial (Non- Deposit accepting or Holding) companies prudential norms ( Reserves Bank ) Direction, 2015 is to be applicable.

Main point of Highlights in RBI Circular on New Regulatory Framework issued 10.11.2014

• Limit of minimum ‘Net Owned Fund’ raised to 2 Crores for all NBFC’s by 2017.

a) Rs. 100 lakh by the end of March 2016,

b) Rs. 200 lakh by the end of March 2017.

• Increase in limit for defining systemically important non-Deposit taking NBFCs (‘NBFCs-ND-SI’), that is asset size of Rs. 500 crore and above as per the last audited balance sheet.
• Assets size of NBFCs in case of multiple NBFCs: For the purpose of determining the status of NBFC’s (NBFC-ND-SI) total assets of all NBFC’s in a group will be aggregated.
• NBFC’s with assets of less than Rs. 500 crores are exempted from the requirement of maintaining Capital To Risk Asset Ratio (CRAR) and complying with credit concentration norms.
• Revised provisioning norms for Standard Assets: The provision for standard assets for NBFCs-ND-SI and for all NBFCs-D, had been increased to 0.40% as follows

a) 0.30% by the end of March 2016.

b) 0.35% by the end of March 2017.

c) 0.40% by the end of March 2018.

• Increase in Tier 1 Capital from existing 7.5% to 10% in phases.
• Disclosures in Financial Statement from 31.03.2015
• Registration/ licence/ authorisation obtained from other financial sector regulators;
• Ratings assigned by credit rating agencies
• Penalties, if any, levied by any regulator.
• Information about country of operation and joint venture partners with regard to Joint Ventures and Overseas Subsidiaries.
• Asset liability profile .

Returns to be file with RBI:- NBFCs-ND, with assets less than Rs. 500 crore, including investment companies, shall henceforth be required to submit only a simplified Annual Return the details of which shall be separately communicated. Till such time, they are require to submit the existing Returns.

On 27.03.2015 RBI has issued Circular no DNBR (PD) CC.No. 024/ 03.10.001/ 2014-15 on Regulatory Framework for NBFC’s :- RBI has issued the following Notifications.

1. For Net Owned Fund requirements
2. Non-Systemically Important Non-Banking financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015.
3. Systemically Important Non-Banking financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015
4. Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998.
5. Non-Banking Financial (Deposit Accepting or Holding) Prudential Norms (Reserve Bank) Directions, 2007.
6. Non-Banking Financial Company – Factor (Reserve Bank) Directions, 2012.

Some of the important points/Highlights of Non-Systemically Important Non-Banking financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015.

• Income recognition, Income from Investments, Accounting of investments, Asset Classification
• Accounting Standards and Guidance Notes issued by the Institute of Chartered Accountants of India (referred to in these Directions as “ICAI”) shall be followed in so far as they are not inconsistent with any of these Directions.
• Need to have Policy on Demand/Call Loans
• Provision for Standard Assets, Every Non-Banking Financial Company shall make provision for standard assets at 0.25 percent of the outstanding.
• Every non-banking financial company shall append to its balance sheet prescribed under the Companies Act, 2013, the particulars in the schedule as set out.
• Requirement as to capital adequacy: only applicable to NBFC-MFI and Infrastructure Finance Company (IFC).
• Submission of a certificate from Statutory Auditor to the Bank: Every non-banking financial company shall submit a 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 and is eligible to hold it. A certificate from the Statutory Auditor, within one month from the date of finalization of the balance sheet and in any case not later than December 30th of that year.
• The leverage ratio of every Non-Banking Financial Company shall not be more than 7 at any point of time, with effect from March 31, 2015.
• Loans against non-banking financial company’s own shares prohibited.
• Loans against security of single product – gold jewellery:- All NBFCs shall maintain a Loan-to-Value (LTV) Ratio not exceeding 75 per cent for loans granted against the collateral of gold jewellery.
• Loans against security of shares:- 1. All NBFCs with asset size of `.100 crore and above shall,

(i) maintain a Loan to Value (LTV) ratio of 50% for loans granted against the collateral of shares, and

(ii) accept only Group 1 securities (specified in SMD/ Policy/ Cir-9/ 2003 dated March 11, 2003 as amended from time to time, issued by SEBI) as collateral for loans of value more than Rs. 5 lakh, subject to review by the Bank.

All NBFCs with asset size of Rs.100 crore and above shall report on-line to stock exchanges, information on the shares pledged in their favour, by borrowers for availing loans. The infrastructure for on-line reporting to the stock exchanges has been put in place. The exchanges may be approached for creation of user IDs. The web links for the respective exchanges are provided below:

BSE : http://nbfc.bseindia.com

NSE: https://www.connect2nse.com/LISTING/

• Some restriction on Concentration of credit/investments: An NBFC which is non-Operative Financial Holding Company ( NOFHC)
• Opening Branches exceeding one thousand in number: Non-Banking Financial Company shall obtain prior approval of the Reserve Bank to open branches exceeding 1000.
• Information with respect to change of address, directors, auditors, etc. to be submitted:- NBFC need to intimate within one from occurrence of the changes.
• Submission of ‘Branch Info’ Return:- all Non-deposit taking NBFCs having total assets more than Rs.50 crore, shall submit a quarterly return on Branch Information within ten days of the expiry of the relative quarter.

Other important matters/things to be remembered is as follows:-

Accounting for taxes on income – Accounting Standard 22 – Treatment of deferred tax assets (DTA) and deferred tax liabilities (DTL) for computation of capital.

• As creation of DTA or DTL would give rise to certain issues impacting the balance sheet of the company, it is clarified that the regulatory treatment to be given to these issues are as under:
• The balance in DTL account will not be eligible for inclusion in Tier I or Tier II capital for capital adequacy purpose as it is not an eligible item of capital.
• DTA will be treated as an intangible asset and should be deducted from Tier I Capital.
• NBFCs may keep the above clarifications in mind for all regulatory requirements including computation of CRAR and ensure compliance with effect from the accounting year ending March 31, 2009.
• In this connection it is further clarified that DTL created by debit to opening balance of Revenue Reserves or to Profit and Loss Account for the current year should be included under ‘others’ of “Other Liabilities and Provisions.”

Requirement for obtaining prior approval of RBI in cases of acquisition/ transfer of control of NBFCs. The prior written permission of the Reserve Bank of India shall be required for –

• any takeover or acquisition of control of an NBFC, whether by acquisition of shares or otherwise;
• any merger/amalgamation of an NBFC with another entity or any merger/amalgamation of an entity with an NBFC that would give the acquirer / another entity control of the NBFC;
• any merger/amalgamation of an NBFC with another entity or any merger/amalgamation of an entity with an NBFC which would result in acquisition/transfer of shareholding in excess of 10 percent of the paid up capital of the NBFC.
• Prior written approval of the Reserve Bank would also be required before approaching the Court or Tribunal under Section 391-394 of the Companies Act, 1956 or Section 230-233 of Companies Act, 2013 seeking order for mergers or amalgamations with other companies or NBFCs.

Exemption from provisions of Chapter III B of the RBI Act, 1934:-

• Housing Finance Institutions
• Merchant Banking company
• Micro Finance Companies
• Mutual Benefit Companies
• Government Companies
• Venture Capital Fund Companies
• Insurance/Stock Exchange/Stock Broker/Sub-Broker
• Others

Article is written by CA. Rahul Sureka, CA, CS and can be reached at [email protected]

Disclaimer: This articles is for general guidance on matters of interest only and does not constitute any professional advice from us. One should not act upon the information contained in this article without obtaining specific professional advice. Further, no representation or warranty (expressed or implied) is given as to the accuracy or completeness of the information contained in this article.