Non-Banking Financial Companies (NBFCs) are the financial institutions incorporated under the Companies Act that are the source of providing services of banking to the people of India without having the bank license. It is allowed to accept deposits which are repayable on demand and eligible for foreign investments upto100%. In this article, we will discuss the regulations for NBFCs in India.

In India, Reserve bank of India sets the regulations for NBFCs and it must be registered as per the rules and regulations under section 45-IA prescribed by the RBI Act,1934. It is allowed to commence its business only after obtaining the “certificate of registration” from RBI. For the registration, minimum of 2 crores of Net Owned fund is required for NBFCs and must be registered as a Public Limited company or Private limited company in India.

Prudential Regulations for NBFCs

  •  Except for NBFC-MFIs and NBFC- IFCs, the leverage ratio of an applicable NBFC shall not be more than 7 at a point in time.
  • According to ICAI, the Notes of Accounting Standards and Guidance shall be followed insofar as they are not inconsistent with any of these Directions.
  •  Including criteria to classify the investments into current and long-term investments, the Board of Directors of every applicable NBFC shall frame investment policy for the company and shall implement the same.
  • The Board of Directors of all applicable NBFC shall make a policy for the company and implement the same if intending to grant call loans.
  • Assets shall be classified under the following categories:-
    • Standard assets
    • Sub-standard assets
    • Doubtful assets
    • Loss assets
  • All the applicable NBFC shall make provision for standard assets at 0.25 percent of the outstanding.
  • All NBFC in a group must be aggregated for the purpose of checking the limit of Rs 500 crore assets size.
  • Every applicable NBFC shall separately disclose provisions for bad and doubtful debts and provisions for depreciation in investments.
  • Every applicable NBFC shall append to its balance sheet particulars in the schedule as set out in this Directions.
  • NBFC is not allowed to lend against its own shares.
  • It is mandatory to maintain a Loan to Value (LTV) ratio of 50% if granting loans for an applicable NBFC having an asset up to Rs 100 crore or more lending against the collateral of listed shares. In the case of fall, it shall make good within 7 days. Loan above 5 lakh can be accepted in Group 1 securities, where lending is done for investment in the capital market.
  • The concentration of credit is applicable to NBFC which is held by an NOFHC.

Instructions to NBFCs

There are following regulations for NBFCs:

  • Applicable NBFCs shall require prior written permission of the banks for the buying or selling of NBFCs, which may further results in the management change. Besides this, if there is a change in shareholding of 26% including progressive increase and any management change which may ultimately result in more than 30% change of the directors.
  • Prior permission must be taken by NBFCs if going to establish any branch, subsidiary, joint venture etc.
  • Applicable NBFC with Foreign Direct Investment (FDI) under the automatic route, shall be permitted to conduct only those activities which are permitted. The prior approval of FIPB is required at the time of Diversification into any other activity.
  • Within fifteen days of a change in rating, Applicable NBFCs with asset up to Rs. 100 crore and above shall furnish information about downgrading, upgrading of assigned rating of any financial product issued to them.
  • All applicable NBFCs with customer interface must follow the KNOW YOUR CUSTOMER (KYC) directions.
  • Investment in FD comes under financial assets and receipt of interest income on FD with banks comes under income from financial assets head.
  • Whether the investment is made directly or through an Alternative Investment Fund (AIF)/ Venture Capital Fund (VCF), it shall be treated alike according to NOF figure.
  • Accounting for taxes on income should not be considered while calculating Tier I or Tier II Capital.
  • No applicable NBFC shall contribute to the capital of a partnership firm.
  • All applicable NBFCs (other than those which are purely into investment activities without any customer interface) shall become a member of all CICs and submit data (including historical data) to them.
  • ALM guidelines should be followed by all applicable NBFCs having assets more than 100 Crore, either they accept/ hold public deposits or not.
  • Once an NBFC reaches the asset size of Rs 500 crore or above, it shall be subjected to the regulatory requirements as per NBFC-ND-SI and Deposit-taking Company (Reserve Bank) Directions, 2016, instead of not having such assets as on the date of last balance sheet.
  • NBFCs shall give at least three months public prior notice to the date of closure of its branches or offices.

For further more details of NBFCs registration, Guidelines of RBI, Classification of NBFCs you can reach to our website: Legal Raasta.

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Non Banking Financial Company- An Overview

Buying and selling of NBFCs in India