All about NBFC Compliance and NBFC returns

Now I shall proceed to highlight only important directions, contained in the said master directions, for all and detail direction reader is advised to read entire master direction.

Let us analysis the Master Directions

Master Direction applicability and Exemption  

1. NBFC which do not accepts public deposit and having an assets size below Rs 500 crore

2. NBFC-Factor, Micro Finance Institution (NBFC-MFI), Infrastructure Finance Company (NBFC-IFC) registered with the Bank under the provisions of RBI Act, 1934 and having an asset size of below Rs 500 crore.

(Above NBFC is referred as “applicable NBFC” hereinafter)

3. The Directions under Chapter IV (Prudential Regulations), paragraph 68(KYC Directions) and Chapter V (FPC guidelines) shall not apply to those applicable NBFCs who have not accessed any public funds and do not have any customer interface.

4. Applicable NBFCs accessing public funds but having no customer interface are exempt from the applicability of paragraph 68 (KYC Directions) and Chapter V (FPC guidelines) of the directions.

5. Applicable NBFCs having customer interface but not accessing public funds are exempt from the applicability of Chapter IV (Prudential Regulations) of the directions.

6. These Directions, except the provisions of paragraph 23, shall not apply to a non-banking financial company being a Government company as defined under clause (45) of section 2 of the Companies Act, 2013 (Act 18 of 2013) and not accepting / holding public deposit.

Important definition (i) customer interface and (ii) public funds

“Customer interface” means interaction between the NBFC and its customers while carrying on its business.

“Public funds” includes funds raised either directly or indirectly through public deposits, inter-corporate deposits, bank finance and all funds received from outside sources such as funds raised by issue of Commercial Papers, debentures etc. 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.;

Prudential Regulations (Chapter IV)

1. Leverage Ratio: –The leverage ratio of an applicable NBFC (except NBFC-MFIs and NBFC-IFCs) shall not be more than 7 at any point of time.

2. Accounting standards: – Accounting Standards and Guidance Notes issued by ICAI shall be followed insofar as they are not inconsistent with any of these Directions.

3. Accounting of investments: – The Board of Directors of every applicable NBFC shall frame investment policy for the company and shall implement the same, including criteria to classify the investments into current and long term investments. (Direction also contain about accounting requirement of investments).

4. Need for policy on demand/ call loans:-The Board of Directors of every applicable NBFC granting/intending to grant demand/call loans shall frame a policy for the company and implement the same.

5. Asset classification:- assets should be classified in following classes:- (i) Standard assets; (ii) Sub-standard assets; (iii) Doubtful assets; and (iv) Loss assets

6. Standard asset provisioning:-Every applicable NBFC shall make provision for standard assets at 0.25 percent of the outstanding.

7. Multiple NBFCs:- all NBFC in a group shall be aggregated for the purpose of checking the limit of Rs 500 crore assets size.

8. Disclosure in the balance sheet:- Every applicable NBFC shall separately disclose provisions for bad and doubtful debts and provisions for depreciation in investments

9. Schedule to the balance sheet:- Every applicable NBFC shall append to its balance sheet particulars in the schedule as set out in this Directions.

10. Loans against NBFCs own shares prohibited:- No applicable NBFC shall lend against its own shares.

11. Loans against security of shares:- Applicable NBFC with asset size of Rs 100 crore and above lending against the collateral of listed shares shall,  maintain a Loan to Value (LTV) ratio of 50% for loans granted against the collateral of shares. In case of fall it shall made good within 7 days. Group 1 securities for loan above 5 lakh can be accepted, where lending is done for investment in capital market. Reporting requirement to stock exchanges on quarterly basis.

12. Concentration of credit/investment for applicable NBFC:- applicable to NBFC which is held by an NOFHC.

13. Information with respect to change of address, directors, auditors, etc. to be submitted: –Every applicable NBFC shall communicate, not later than one month from the occurrence of change of address, directors, and auditors.

Fair Practices Code for applicable NBFC (chapter V)

Applicable NBFCs having customer interface shall adopt the Fair Practices Code which interalia shall include Loan appraisal and terms/conditions, Disbursement of loans including changes in terms and conditions, General, Responsibility of Board of Directors, Grievance Redressal Officer, Language and mode of communicating Fair Practice Code, Regulation of excessive interest charged by applicable NBFC, Complaints about excessive interest charged by Applicable NBFCs, Repossession of vehicles financed by applicable NBFCs, Lending against collateral of gold jewellery etc.

Governance Issues/ Miscellaneous Instructions

1. Acquisition / Transfer of Control of Applicable NBFCs :-An applicable NBFC, shall require prior written permission of the Bank for the following:

a. Takeover or acquisition of control of NBFC, which may or may not result in change of management;

b. Change in shareholding of 26%, including progressive increase.

c. Any change in the management of the NBFC which would result in change in more than 30 per cent of the directors.

Such NBFCs is required to make application of prior approval and also required to give prior public notice about a change in the control/ management.

2. Opening of Branch/Subsidiary/Joint Venture/ Representative Office or Undertaking Investment Abroad by NBFCs:- prior permission is required incases of opening of branch/subsidiary/joint venture/representative office or undertaking investment abroad by applicable NBFCs. NBFC is required to follow other condition as mentioned in para 63 of the said master direction.

3. Expansion of activities of applicable NBFC through automatic route:- Applicable NBFC with Foreign Direct Investment (FDI) under the automatic route shall be permitted to undertake only those activities which are permissible under the automatic route. Diversification into any other activity shall require the prior approval of FIPB.

4. Ratings of applicable NBFCs:- All applicable NBFCs with asset size of Rs 100 crore and above shall furnish information about downgrading / upgrading of assigned rating of any financial product issued by them, within fifteen days of such a change in rating..

5. Applicability of Know Your Customer (KYC) Direction, 2016:- All applicable NBFCs having customer interface shall follow the Know Your Customer (KYC) Direction, 2016,

6. Non- Reckoning of Fixed Deposits with banks as Financial Assets:- Investments in fixed deposits shall not be treated as financial assets and receipt of interest income on fixed deposits with banks shall not be treated as income from financial assets

7. Investment through Alternative Investment Funds – Calculation of NOF of an applicable NBFC:- While arriving at the NOF figure, investment made by an applicable NBFC in entities of the same group concerns shall be treated alike, whether the investment is made directly or through an Alternative Investment Fund (AIF) / Venture Capital Fund (VCF).

8. Accounting for taxes on income – Accounting Standard 22 – Treatment of deferred tax assets (DTA) and deferred tax liabilities (DTL) for computation of capital:– it should not be considered while calculating Tier i or Tire ii Capital.

9. Applicable NBFCs not to be partners in partnership firms :- No applicable NBFC shall contribute to the capital of a partnership firm or become a partner of such firm.

10. Submission of data to Credit Information Companies (CICs) – Format of data to be submitted by Credit Institutions:- All applicable NBFCs (other than those which are purely into investment activities without any customer interface) shall become member of all CICs and submit data (including historical data) to them.

11. Asset Liability Management:- ALM guidelines is applicable to all applicable NBFCs having assets size of more than 100 Crore, irrespective of whether they are accepting / holding public deposits or not.

12. Criteria for deciding NBFC-ND-SI status:-Once an NBFC reaches an asset size of Rs 500 crore or above, it shall be subject to the regulatory requirements as per Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016, despite not having such assets as on the date of last balance sheet.

13. Need for public notice before Closure of the Branch / Office by applicable NBFC:-NBFCs shall give at least three months public notice prior to the date of closure of any of its branches / offices

Other things to be remembered for proper NBFCs compliance are as under:-

1. Return to be file by NBFCs

2. Financial Assets and income from financial assets should be more than 50%.

3. Auditor certificate needs to be uploaded on https://cosmos.rbi.org, auditor certificate format has been revised once again.

RBI keeps on issuing new guidelines, notification, Master Circular or Directions (https://nbfc.rbi.org.in) which all NBFCs have to comply with.

Article is written by CA Rahul Sureka, FCA, CS, LLB and can be reached at [email protected] or 9773450180.

Disclaimer: This article is for general guidance on matters of interest only and does not constitute any professional advice from me/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.

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