2. The details of changes made to the existing regulatory framework on Corporate Governance and Disclosures for NBFCs are given in Annexes 1-5.

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1 Comments/suggestions on the draft guidelines may be sent to...forwarded to the Chief General Managerin-Charge, Department of Non-Banking Supervision, Reserve Bank of India, Central Office, WTC, Cuffe Parade, Mumbai or ed latest by January 10, RBI places on its Website Draft Guidelines based on Usha Thorat Committee Report on Issues and Concerns in NBFC Sector In order to adopt a consultative approach, the Reserve Bank of India has, today, placed on its website, draft guidelines to address issues and concerns in the NBFC sector. The draft guidelines are based on recommendations made by the Working Group on the Issues and Concerns chaired by Smt. Usha Thorat, former Deputy Governor, Reserve Bank of India. The Report of the Working Group was placed on RBI website in August It may be recalled that the Working Group was constituted to review the existing regulatory and supervisory framework of nonbanking finance companies (NBFCs). The objectives of the Working Group were to address issues relating to regulatory arbitrage and systemic risk, so as to create a strong and resilient non-banking financial sector. The draft revised guidelines relate to entry point norms, principal business criteria, prudential regulations, liquidity requirements for NBFCs and corporate governance. While accepting some of the suggestions, the Bank has been mindful that their implementation should not disrupt the sector. Hence, ample transition time has been proposed to bring the new regulatory framework into existence. Comments/suggestions on the draft guidelines may be forwarded to the, Department of Non-Banking Supervision, Reserve Bank of India, Central Office, WTC, Cuffe Parade, Mumbai or ed latest by January 10, Press Release : /987 Alpana Killawala Chief General Manager Review of NBFC Regulatory Framework Recommendations of the Working Group on Issues and Concerns in the NBFC Sector Corporate Governance and Disclosures for NBFCs All NBFCs (except primary dealers) December 12, 2012 NBFC Sector Corporate Governance and Disclosures for NBFCs The Reserve Bank set up a Working Group (WG) under the chairmanship of Smt. Usha Thorat, former Deputy Governor, RBI, public domain by the Reserve Bank for comments. The report along with the feedback was examined by the Reserve Bank and accordingly, it has been decided to amend the existing Directions of NBFCs wherever applicable. 2. The details of changes made to the existing regulatory framework on Corporate Governance and Disclosures for NBFCs are given in Annexes 1-5. Review of NBFC Regulatory Framework Recommendations of the Working Group on Issues and Concerns in the NBFC Sector Entry Point Norms, Principal Business Criteria (PBC), Multiple and Captive NBFCs DNBS (PD) CC.No. / / December 12, 2012

2 All NBFCs (except primary dealers) NBFC Sector Entry Point Norms, Principal Business Criteria (PBC), Multiple and Captive NBFCs. The Reserve Bank set up a Working Group (WG) under the chairmanship of Smt Usha Thorat, former Deputy Governor, RBI, public domain by the Reserve Bank for comments. The report along with the feedback was examined by the Reserve Bank and accordingly, it has been decided to amend the existing regulatory framework for NBFCs, wherever applicable. 2. The details of changes made to the existing regulatory framework on entry point norms, principal business definition and certain fresh prescriptions for multiple companies in a group as also captive companies are given in the Annex. Encl: as above. 1. Approach to Regulation Revised Guidelines on Entry Point Norms, Principal Business Criteria (PBC), Multiple and Captive NBFCs Annex 1.1 In order to focus regulatory resources to where the risks lie, the approach to regulation and supervision has been reviewed and will be informed by the following broad guiding principles : i. NBFCs would henceforth be classified under two categories - exempted NBFCs and registered NBFCs. ii. All registered NBFCs would be under RBI regulation. iii. The Bank reserves the right to bring exempted NBFCs under regulation, should the need arise thereof at a later date. iv. All deposit taking companies, irrespective of size, would continue to be registered NBFCs with RBI and as such would fall under the purview of RBI regulations. In other words, no deposit taking company is exempt from registration and thereby RBI regulation. 2. Nomenclature for Various Categories of NBFCs : 2.1 Henceforth, in the interest of clarity and common understanding, the nomenclature used for various entities in NBFC sector would be as under : i. Registered NBFCs : Registered NBFCs are those which have been registered and issued a CoR by RBI and are under the purview of RBI regulation. ii. Exempted NBFCs : Exempted NBFCs are those which are exempted from registration by RBI. 3. Exempted NBFCs : 3.1 The following categories of NBFCs are exempted from registration with the Reserve Bank i. NBFCs with asset size below Rs. 25 crore whether accepting public funds or not. ii. NBFCs with asset size below Rs. 500 crore and not accepting public funds, directly or indirectly.

3 3.2 The provisions of Chapter IIIB of the RBI Act 1934, except Section 45N, will not apply in respect of the above exempted category of NBFCs. These NBFCs will have the option of surrendering the CoR on a voluntary basis. 3.3 The rationale for exemption is that as the above are essentially small non-deposit taking NBFCs and do not contribute to any major systemic risks or major disruptions in the market. Such a measure would not prevent small but potentially dynamic and innovative start-up companies from entering into the financial activity. 4. Position Relating to Existing NBFCs : 4.1 Existing NBFCs-ND with asset size below the threshold of Rs. 25 crore but which intend to continue to be registered are required to notify the Bank within three months from the date of these Directions, with a road map for increasing their asset size to Rs. 25 crore or above within a period not exceeding 2 years. Notwithstanding the fact that any such company has obtained a Certificate of Registration under Section 45IA of the RBI Act 1934, it shall be required to apply for a fresh COR within a period of 6 months from the date of achieving the asset size threshold. 4.2 Further, NBFCs-ND which de-register would need to approach the Bank afresh for CoR if a) individually the asset size exceeds Rs. 25 crore or b) the asset size exceeds Rs. 500 crore, even if such NBFC does not access public funds. 4.3 In addition, financial entities as defined at para 6.2.ii below will also need to register themselves with the Bank as NBFCs. 5. Entry Point Norms 5.1 In terms of Section 45IA of the RBI Act, 1934, no NBFC shall commence or carry on the business of NBFI without having Net owned funds (NOF) of Rs. 25 lakh or such other amount not exceeding Rs. 2 crore as may be specified by RBI. With effect from April 1999 all new NBFCs were required to have a minimum NOF of Rs. 2 crore for the purpose of registration with the Bank. Since then, the NBFC sector has undergone a sea change from being small family run businesses, primarily using own funds, to large sized NBFCs, dependent largely on public funds. NBFCs have also entered into several newer areas of financial services. 5.2 New companies having NOF not less than Rs. 2 crore and minimum asset size of Rs. 25 crore, fulfilling the revised PBC as given in paragraph 6 below are required to obtain registration. 5.3 Foreign owned companies will however require the CoR from the Bank before commencing any non-banking financial activity. They will also continue to follow the minimum capitalization norm as under FEMA. 6. Principal Business Criteria (PBC) 6.1 In terms of the Press Release 99/1269 dated April 8, 1999 issued by RBI, a company is treated as an NBFC if its financial assets are more than 50 per cent of its total assets (net of intangible assets) and income from these financial assets is more than 50 per cent of the gross income. Both these tests are required to be satisfied. This also entails that NBFCs under the current regulation can conduct non-financial activities along with financial activities, as NBFCs registered with the Bank, which could pose risk to its financial activities. There are also operational risks in monitoring such entities as their business modules are not consistent with financial activities. It is felt that financial activity as defined under Section 45-I c of the RBI Act, 1934 must be a significant part of the business for a company to be considered as a financial institution. It has, therefore, been decided that NBFCs should gradually move towards undertaking financial activities, primarily. Further, there could be systemically important financial entities not fulfilling one of the twin criteria for principal business but holding large financial assets that could have implications for the financial sector. 6.2 Consequently, the revised PBC for the purpose of registration as NBFC is redefined as follows: i. A company not accepting deposits, will qualify for registration as NBFC if and when its financial assets 1 aggregate Rs 25 crore and constitute 75 per cent and above of its total assets (net of intangible assets) and financial income constitutes 75 per cent or above of its gross income subject to conditions at para 5 above. ii. Financial entities having asset size of Rs.1000 crore or above, holding financial assets which constitute 50% of the total assets OR generate financial income which as a proportion of the gross income is at least 50%, will need to be registered and regulated by the Bank. 7. Roadmap for existing NBFCs to comply with revised Principal Business Criteria 7.1 Existing NBFCs will be given a period of 2 years with the following milestones for achieving the minimum threshold of Rs.

4 25 crore of financial assets: March % March % 7.2 NBFCs-ND unable to comply with the threshold within the two year period, will be deregistered by the Reserve Bank through a public notification and shall no longer be eligible to carry out such activity and must exit the business within a given time frame. 7.3 Existing NBFC-D failing to achieve the 75 % threshold in financial assets and income by March 2015 will not be allowed to accept fresh deposits or renew deposits thereafter. They will be required to repay deposits within a given timeframe as decided by the Bank and be deregistered thereafter. 7.4 Principal business for AFCs has been redefined in alignment with that of the revised principal business criteria for NBFCs. Accordingly, a minimum of 75 per cent of the assets of AFCs (as against 60 per cent at present) should be in asset financing activities and at least 75 per cent of total income (as against 60 per cent at present), should be from these asset financing activities. Existing AFCs would be allowed to conform to the revised principal business criteria within a period of two years from the date of this Directions, in two stages as per the milestones given above. 8. Multiple NBFCs 8.1 There are groups in the sector which have floated multiple non-deposit taking NBFCs for different reasons. However, such entities that are part of a corporate group or are floated by a common set of promoters will not be viewed on a standalone basis and instead their total assets will be aggregated to determine if such consolidation leads to the cut off limit prescribed for a systemically important NBFC i.e. Rs. 100 crore of assets. For this purpose, the definition of the word group will be the same as per Accounting Standards For the purpose of regulation, the total assets of all NBFCs in a group will be taken together to determine the cut off limit of Rs. 100 crore for application of prudential norms. All provisions of the NBFC Prudential Norms, 2007 will be applicable to each NBFC in the group. For this purpose, Statutory Auditors would be required to certify the asset size of all the NBFCs if the Group has more than one NBFC. 8.3 In case there is a deposit accepting NBFC within the group, it would be supervised on a solo basis and all regulations prescribed for registered NBFCs would apply. 9. Captive NBFCs 9.1 It has been observed that a number of manufacturing groups have been floating NBFCs which are captive to their requirements to facilitate the sale of their products or services. A captive NBFC is defined as one which holds receivables generated on account of its parents activities at least to the extent of 90% of its total assets, net of intangible assets. The business franchise of such captives is inextricably linked to the parent s fortunes. As a result, credit underwriting standards could be weaker in such entities and the recall, if any, of parental assets could further stress the captive NBFC. Consequently, risks in the captives are much higher and warrant a higher Tier I capital, if not a different start-up NOF requirement. 9.2 It has, therefore, been decided that captive NBFCs shall maintain Tier I capital at 12 per cent, as against 7.5 per cent at present. Existing captive NBFCs that do not fulfill the requirement would be given a period of three years from the date of this notification to comply, upon which they shall produce a statutory auditor s certificate of compliance. 1 Financial Assets will include all assets that are financial in nature except cash, bank deposits, advance payment of taxes and deferred tax payments. 2 Companies in the Group, shall mean an arrangement involving two or more entities related to each other through any of the following relationships : Subsidiary parent (defined in terms of AS 21), Joint venture (defined in terms of AS 27), Associate (defined in terms of AS 23), Promoter-promotee (as provided in the SEBI (Acquisition of Shares and Takeover) Regulations, 1997) for listed companies, a related party (defined in terms of AS 18), Common brand name, and investment in equity shares of 20% and above. Review of NBFC Regulatory Framework Recommendations of the Working Group on Issues and Concerns in the NBFC Sector Liquidity Management for NBFCs All NBFCs (except primary dealers)

5 December 12, 2012 NBFC Sector Liquidity Management for NBFCs The Reserve Bank set up a Working Group (WG) under the chairmanship of Smt. Usha Thorat, former Deputy Governor, RBI, public domain by the Reserve Bank for comments. The report along with the feedback was examined by the Reserve Bank and accordingly, it has been decided to amend the existing regulatory framework for NBFCs wherever applicable. 2. The details of changes made to the existing regulatory framework on liquidity management for NBFCs are given in the Annex. Encl: as above. Revised Guidelines on Liquidity Management for NBFCs Annex As NBFCs are involved in maturity transformation, liquidity risks are endemic to them, with assets being mostly illiquid and of longer tenure than liabilities. Most NBFCs are non-deposit taking entities and are dependent on wholesale funding markets. As a result, several of them would be exposed to wholesale funding risk. NBFCs are seen to be dependent on money market instruments such as CPs and short term bank borrowings but have little flexibility in shedding their long term assets under situation of stress. 2. As per the extant regulatory framework, the Bank has stipulated the maintenance of a statutory liquidity ratio of 15% of aggregate deposit for deposit accepting NBFCs, besides, making applicable ALM guidelines to those holding deposit of Rs. 20 crore and above. The main focus of the ALM guidelines is on short term mismatches running up to 30 days and NBFCs are expected to ensure that the negative gap in the 1-30 day bucket does not exceed 15% of cash outflows. Such norms have also been extended to systemically important NBFCs-ND and the same guidelines relating to negative gap have been mandated for them. However, our experience bears out the fact that the existing liquidity and ALM guidelines do not adequately address liquidity risks faced by the NBFCs. 3. The Working Group to review the extant regulatory framework of NBFCs made a number of recommendations on liquidity management in NBFCs. Accordingly, it has been decided that, henceforth, all registered NBFCs - deposit taking and nondeposit taking, should maintain high quality liquid assets in cash, bank deposits available within 30 days, money market instruments maturing within 30 days, investment in actively traded debt securities (valued at 90 per cent of the quoted price) and carrying a rating not lower than AA or equivalent, equal to the gap between total net cash inflows and outflows over the 1 to 30 day time bucket as a liquidity coverage requirement. In other words, there should not be any liquidity gap in the 1-30 day bucket. 4. For deposit taking NBFCs, the extant requirement of SLR will continue. Review of NBFC Regulatory Framework Recommendations of the Working Group on Issues and Concerns in the NBFC Sector Prudential Regulations All NBFCs (except primary dealers) December 12, 2012 NBFC Sector Prudential Regulations

6 The Reserve Bank set up a Working Group (WG) under the chairmanship of Smt. Usha Thorat, former Deputy Governor, RBI, public domain by the Reserve Bank for comments. The report along with the feedback was examined by the Reserve Bank. Consequently, it has been decided to amend the existing regulatory framework for NBFCs, wherever applicable. 2. The details of changes made in prudential regulations, are given in the Annex. Encl: as above. 1. Tier l Capital Revised Guidelines pertaining to Prudential Regulatory Framework Annex 1.1 At present, all deposit taking NBFCs and systemically important non-deposit taking NBFCs (NBFCs-ND with asset size of Rs. 100 crore and above) are required to have minimum CRAR of 15%. Consequently Tier l capital cannot be less than 7.5%. For Infrastructure Finance Companies (IFCs), however, Tier l capital cannot be less than 10%. Similarly NBFCs primarily engaged in lending against gold jewellery have to maintain a minimum Tier l capital of 12 percent w.e.f. April 01, Based on the Working Group recommendations, it has been decided that Tier l capital be raised to 12% for all captive NBFCs (90 per cent and above of total assets (net of intangibles) are on financing parent company s products/services), and for NBFCs that are into lending to / investment in sensitive sectors namely, capital market, commodities and real estate, to the extent of 75% or more of their total assets net of intangible assets. Other NBFCs including IFCs, shall maintain Tier l capital at 10%. Existing NBFCs that do not fulfill the requirement would be given a period of three years from the date of this notification to comply, upon which they shall produce a statutory auditor s certificate to the effect. 2. Risk weights for Capital Market Exposures (CME) and Commercial Real Exposures (CRE) 2.1 The risk weights on exposure to capital market and real estate, for NBFCs in a bank group shall be the same as specified for banks. Further, the risk weights for NBFCs that are not sponsored by banks or that are not part of a group that contains a bank may be raised to 150 per cent for capital market exposures and 125 per cent for CRE exposures. 2.2 Notwithstanding the above, where Tier l capital has been prescribed at 12% such as for captive NBFCs or those that have exposure to sensitive sectors as specified in paragraph 1.2 above, the higher risk weights as stated in para 2.1 above, would not be applicable. 3. Asset Classification and Provisioning Norms: 3.1 At present, the period for classifying loans into NPAs in case of NBFCs is higher at 180/360 days compared to 90 days for banks. It has been decided that the asset classification and provisioning norms (including standard asset provisioning norms) should, in a phased manner, be made similar to that of banks for all registered NBFCs irrespective of size. The same will be implemented in phases, viz; a 120 day norm shall be applied from April 01, 2014 to March 31, 2015 and a 90 day norm thereafter. A one-time adjustment of the repayment schedule which shall not amount to restructuring will, however, be permitted. 3.2 Further, it is proposed to raise the provisioning for standard assets from 0.25 per cent to 0.40 per cent of the outstanding amount w.e.f. March 31, 2014 for all NBFCs 4. Deposit Taking NBFCs 4.1 Under the current regulatory framework, an Asset Finance Company having net owned funds (NOF) of twenty five lakh of rupees or more and complying with all the prudential norms and with capital adequacy ratio of not less than fifteen percent need not be rated for the purpose of acceptance of deposits. 4.2 It has been decided that all existing NBFCs-D, including AFCs, should be credit rated and that unrated NBFCs, including AFCs, should not be permitted to accept deposits. Existing unrated NBFCs-D will be given a period of one year to get

7 themselves rated if they wish to continue to accept deposits. Thereafter, they would not be allowed to accept any fresh deposits or renew existing deposits, till they get themselves rated. 4.3 Further, the limit for acceptance of deposits for rated AFCs is reduced from 4 times to 2.5 times NOF. AFCs presently exceeding the limit of 2.5 times NOF shall not renew or accept fresh deposits till such time they reach the revised limit. Each of such AFCs would be given specific time period within which they should comply with the norm of 2.5 times the NOF. 5. Government NBFCs 5.1 All Government companies that qualify as NBFCs under the revised principal business criteria will be required to comply with the regulatory framework applicable to NBFCs at the earliest.