NBFC - Overview and Regulatory Framework. B. Renganathan

Transcription

1 NBFC - Overview and Regulatory Framework B. Renganathan

2 Non Banking Financial Company Non Banking Company and Carrying on the business (principal business) of a financial institution within the meaning of clause (c) and (f) to Section 45-I of the Reserve Bank of India Act, 1934

3 Business of a Financial Institution includes: Making loans and advances, Acquisition of shares, stock, bonds, debentures, securities issued by Government or other marketable securities, etc, Letting / delivering of goods to hirer under Hire Purchase Agreement, Carrying on any class of insurance business, Chit business or Accepting Public Deposits under any Scheme / Arrangement. Commodities Trading???????????

4 But it does not include: Agricultural Operations or Industrial Activity or Purchase or sale of goods (other than securities) or providing of any services or Purchase, construction or sale of immovable property

5 Registration of an NBFC Minimum Net Owned Fund of Rs. 200 Lacs and Certificate of Registration u/s 45-IA of the Reserve Bank of India Act, 1934

6 Banks Vs NBFCs

7 Evolution of NBFCs

8 Committees James Raj Committee ban on prize chit and other schemes Chakravarthy Committee review the working of monetary system Vaghul Committee measures to widen and deepen the money market Narasimhan Committee compulsory registration with RBI of all NBFCs

9 Committees Dr. A.C. Shah Committee bringing reforms in NBFC sector Khanna Committee comprehensive and effective supervisory framework for NBFC Vasudev Committee entry norms, prudential norms, issues concerning unincorporated bodies Malegam Committee- MFIs

10 NBFC the famous indian story..

11 Regulatory Framework Chapter III B, III C and V of RBI Act, 1934 RBI Directions RBI circulars, notifications, Guidelines

12 Types of NBFCs Classification of NBFCs: Loan Company, Investment Company, Asset Finance Company Infrastructure Finance Company( 11/02/2010) These are further classified into accepting / not accepting Public Deposits

13 Classification of NBFCs NBFCs- Accepting Public Deposits Not accepting public deposits Systemic important NBFCs (asset size > Rs.100cr)

14 Definitions Asset Finance Co. (AFC) Co./FI financing of physical assets supporting productive/economic activity such as - Automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines Investment Company means any company which is a financial institution carrying on as its principal business the acquisition of securities. Loan Company principal business finance through loans/advances not includes AFC

15 Criteria for ascertaining NBFC The Company shall be treated as an NBFC if: Its financial assets>50% of its total assets (netted off by intangible assets) and Income from financial assets>50% of its gross income (press release dated April 8, 1999) Both the requirements should be fulfilled. NBFC-ND-SI >/= 100 cr on attainment of asset size of 100 Cr effective date.??????

16 Principal business- determination thereof Not quantifiable intention of parties Numerical dimension cannot take away the primary nature of business RBI-Asset & Income criteria (only by a circular implied only through Auditor s certificate)

17 Judicial pronouncements Section 372 A- investment companyacquisition of shares test of principal business Prime business carried at the relevant point in time.

18 Exemptions Housing Finance Company Merchant Banking company Micro finance companies Mutual benefit companies Government companies Venture capital fund companies Insurance companies Stock broking companies Stock exchanges Nidhi & chit companies Securitization & Reconstruction companies Mortgage Guarantee companies

19 Public Deposits

20 Legislative Framework for Public Deposits Prior to CA 2013 Section 58A-58AAA of the Companies Act, 1956 Companies (Acceptance of Deposits) Rules, 1975 Non Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 Way forward Sections of the Companies Act, 2013 The Companies (Acceptance of Deposits) Rules, 2014 Non Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998

21 Public Deposits??? Any receipt of money by way of deposit or loan but does not include... The definition conveys what not to be treated as Public Deposits

22 Companies Act, 2013 Non applicability to NBFCs Sections & 76 Acceptance of Deposits But beware of??????????????

23 Companies Act, 2013 Applicability of Section 75 Damages for fraud- liability under section 447 Class Action suits

24 NBFCs accepting deposits

25 NBFCs Accepting / Holding Public Deposits (NBFC-D) Legislative Frame work RBI Act, 1934, RBI Directives on Acceptance of Public Deposits, Prudential Norms, etc. Certificate of Registration (accepting/ holding Public Deposits), Creation of Reserves, Maintenance of Liquid Assets and Credit rating CRAR 12% Quantum of PDs

26 Minimum credit rating Period of Deposit 12 to 60 months Quantum of deposits. AFC (min. invst grading) 4xNOF Loan & Investment Companies 1.5xNOF Rate of Interest Limitation on payment of Brokerage

27 Deposits through Advertisement. Register of Deposits Information in the director s report Safe Custody of approved securities

28 Systemically important NBFCs not accepting / holding Public Deposits (NBFC-ND-SI) Till February, 2007 NBFCs ND were subject to minimal regulation Concept of NBFC-ND-SI and Prudential norms NBFCs-ND having an asset size of Rs. 100 crores or more as per the latest audited balance sheet were recognized as Systemecially important NBFCs not accepting / holding Public Deposits Capital adequacy requirement (CRAR-12%) and concentration of credit and investment were made applicable to them

29 NBFCs with an asset size of Rs. 50 crores or more but less than 100 crores & not accepting / holding Public Deposits September, 2008

30 Definitions Owned Fund paid up equity capital, CCPS, free reserves, share premium a/c, capital reserves representing surplus arising out of sale proceeds of asset. Does not include revaluation reserves, accumulated loss balance, book value of intangible assets and deferred revenue expenditure. Systematically important non-deposit taking NBFC NBFC not accepting/holding PDs and having total assets of Rs. 100 cr and above.

31 Definitions Tier I capital owned fund as reduced by- Investment in shares of other NBFCs Shares, debentures, bonds, o/s loans & advances Hire purchase and lease finance made to & deposits with subsidiaries/companies in the same group > 10% of the owned fund Perpetual debt instruments issued by NBFC-ND- SI upto 15% of aggregate Tier I

32 Definitions Tier II capital Preference shares (non-ccps) Revaluation reserve (disc. Rate of 55%) General provisions and loss reserves to specified extent. Hybrid debt capital instruments. Subordinated debt Perpetual Debt instruments issued by NBFC-ND-SI in excess of what qualifies under Tier I

33 Concentration of Credit norms

34 existing limits under para 18 Lending limits To a single borrower- 15% of Owned funds To a single group of borrowers- 25% of Owned funds Investment limits In the shares of a Single Company- 15% of Owned funds In the shares of single Group of Companies - 25% of Owned funds Investment & Lending both To a single Company- 25% of Owned funds To a single group of companies- 40% of Owned funds

35 Infrastructure Companies

36 Definition Infrastructure Loans: Credit facility by NBFCs to a borrower by way of - Term loan/project loan/equity shares - Long term funded facility to a borrower company engaged in: Developing/Maintaining/Operating any infrastructure facility in foll sectors: Road/Highway Project Port/Airport/Inland waterway Telecommunication services Industrial park/sez Educational institutions/hospitals

37 IFCs Non deposit accepting company Deployment of minimum 75% of total assets in infrastructure loans Net owned fund of Rs 300 cr or more Minimum credit rating of A CRAR of 15% Minimum Tier I capital of 10% Certification by auditors

38 Concentration of credit norms (concession/ relaxation to IFC) In addition to the existing limits under para 18 Lending limits To a single borrower by 10% of Owned funds To a single group of borrowers by 15% of Owned funds Lending & Investment Limits to a single borrower by 5% of owned funds To a single group of borrowers by 10% of owned funds

39 Core Investment Companies.

40 Business Model: Holding stake in Group companies & funding them Difficulty in ascertaining: only for holding/ trade absence of clarity in the system- investment only for holding business of acquisition of shares. has systemic implications on account of access to Public Funds A different footing than others-constraints-regulatory Framework

41 CICs Not less than 90% of its net assets in group companies (investment in equity, preference shares, bonds, debentures, debt or loans) Not less than 60% in equity or convertible within a period of 10 years to equity Net Assets: Total assets cash& bank balances, investment in money market instruments, money market mutual funds, advance payment of taxes, deferred tax)

42 Only for holding. No trading( except for dilution or disinvestment) Not to carry on any other financial activity(except investment in bank deposits, money market insturments, government securities, bonds, debentures of group companies granting of laons to group companies, issue of guarantees on behalf of group companies) Not holding/accepting public deposits.

43 Systemically important CIC CIC Total assets > Rs 100 crores Either individually or with other CICs in the Group Raises or holds public funds Total Assets: All assets appearing on the asset side Public Funds: funds raised through public deposits, CPS, debentures, ICDs, bank finance other than Instruments convertible into equity shares within a period not exceeding 10 years

44 CICs Certificate of Registration CICs-ND-SI asset size >/= 100 crs Capital to Risk Assets Ratio Adjusted Networth not less than 30% of Risk weighted assets +risk adjusted value of off-balance sheet items Leverage Ratio: Outside Liabilities =< 2.5xANW Exemptions: CICs fulfilling above ratios exempt Min. NOF and Prudential Norms.

45 Residuary NBFC NBFI- company Receives deposit under any scheme or arrangement By contribution or subscription/ sale of units /certificates/other instruments And not : AFC HFC LC IC Insurance company

46 Residuary NBFC Principal business: acceptance of deposits & investing in approved securities FD- tenor -12 months to 84 months Maintain investments as per RBI directions + liquid assets Mobilisation and deployment different from other NBFCs Comply with Prudential Norms

47 Micro Fiance companies Non deposit taking NBFC Minimum NOF Rs 5 crs Not less than 85% of its net assets in qualifying assets Loan to a borrower whose rural household income is not more than Rs. 60k/ urban household income not more than Rs 1.2 lakhs Loan amount not to exceed Rs 50k Loan without collateral Tenure: >/=24 months no prepayment penalty

48 MFI Capital adequacy at 15% Asset classification & provisioning Norms Interest not to exceed 26% No penalty on delayed payment

49 Mutual benefit company/nidhi company Fundamental Principal: to mobilise savings from members Notified u/s 620A of the Companies Act, 1956 Members to be allotted atleast 10 shares Lends money only to members Only individuals to be members No dealing with non members.

50 Chit Funds Chit Funds Act, Regulated by State Governments Subscribers in a Group contribute installments for a certain no of months Return of money auctions / tender (provides a ump sum to the needy) Money borrowed by a subscriber is against his own future contribution

51 Infrastructure Debt fund- NBFC Taking over loans extended to infrastructure projects created through PPP route AND Completed one year of operations Tripartite agreements amongst IDF, Concessionaire and the Project authority Sponsor- only NBFC- IFCs Minimum NOF Rs 300 crs Existence for atleast 5 years

52 Factors- NBFC Business of acquisition of Receivables or financing by way loans or any other means Financial assets in Factoring - 75% of total assets + income from Factoring -75% of gross income. NOF- Rs. 5 crs

53 Mortgage Guarantee Companies Providing guarantee to HFCs and banks on behalf of home loan borrowers Invocation of guarantees in case of default Mortgage Guarantee Company ( Reserve Bank) Guidelines, 2008 NOF Rs. 100 crores

54 Special Auditor s Report

55 Non Banking Financial Companies Auditor s Report (Reserve Bank ) Directions, 2008 Applicable to every auditor of a NBFC Additional report to the Board of Directors on: (all NBFCs) If the NBFC has obtained CoR and contiunes to carry on the NBFC business NBFC continues to do such business based on income & asset pattern In case of AFCs- proper classification as such.. NBFCs- accepting deposits Public deposits & other borrowings are within the limits and if in excess regularized in the manner envisaged in the Directions Any default in repayment to Depositors Confirmation on whether minimum investment grade credit rating has been obtained confirmation on any default in paying deposits Confirmation on compliance of prudential norms, capital adequacy, liquid asset requirement Confirmation on compliance with furnishing various returns in time to RBI

56 Qualifications reasons thereof to be stated A separate report on such qualifications (non compliance on any of the Directions) to be forwarded directly to RBI NBFCs not accepting deposits Resolution of board for not accepting deposits Has it accepted any deposits Confirmation on compliance with prudential norms In case of SI_ND_authentication of the capital adequacy ratio If the annual statement of capital funds, risk assets/exposures- furnished to RBI in time.

57 Certification by auditors Continuation as a NBFI Income/ asset pattern to be disclosed

58 NBFC Other Business

59 Entry into Insurance & Agency business on fee basis and without risk participation. Insurance business through a JV with risk participation( no recourse to NBFC) Issue of Credit Card (including co-branded credit cards. Distribution of Mutual Fund products.

60 Change in Management and Control

61 Prior written permission of RBI: Acquisition through control Merger with another entity giving control to the other entity Merger transfer of ownership > 10% Merger under Companies Act.

62 Change in Control/Management Public notice 30 days prior to sale of/transfer of ownership/ transfer of control. by NBFC and transferor/transferee/jointly. Control same as defined in SAST. To indicate intention to sell/transfer, particulars of the transferee, reasons thereto. Published in one leading national and local (place of regd office of NBFC) vernacular language newspaper. Exit option to Deposit holders.

63 Change in Control/Management Transfer Vs further issue of shares???????? Control through AoA!!!!!!!!!!

64 FDI & ODI- NBFCs

65 FDI in NBFCs Automatic route 100% FDI permitted in 18 activities. Approval route Investment Companies. Minimum Capitalization norms. 100% foreign owned NBFC step down subsidiary NBFCs without additional capital. JV NBFCs (less than 75% FDI) setup by NBFC subsidiaries complying with minimum capitalization. NBFC (Non Fund Based Activities) No subsidiary Half yearly reporting..- Statutory Auditor s Certificate

66 Overseas Investments by NBFCs Prior approval from regulatory authorities in both India and abroad. NOC from DNBS of RBI. Activities intended to be carried out by overseas entity to be clearly stated Direct investment permitted activities approved under FEMA. Core activity regulated by a financial regulator abroad ODI Limit Vs Para 18???

67 Aggregate overseas investment </=100% of NOF Investment in single entity </= 15% of NOF Level of net NPA </= 5% of net advances NBFC- earning profits in the last 3 years Satisfactory regulatory compliance and servicing of public deposits Annual certificate statutory auditors

68 Miscellaneous

69 NBFCs Reserves

70 Statutory Reserves sec 45IC of RBI Act. Not less than 20% of the net profits Creation of Debenture Redemption Reserves (DRR)

71 Amendments Provision on standard assets: 0.25% of the outstanding assets To be shown separately as contingent provision against Standard Assets Submission of B/S and P/L Account: All NBFCs to finalize B/S within 3 months from the date of finalization of B/S

72 Amendments Not to be partners in Partnership Firm No NBFC (including those accepting public deposit) shall contribute to capital of a firm or become a partner NBFC (including those accepting public deposit) which had already contributed to the capital shall seek early retirement from the firm

73 Amendments Prohibition loan against its own debentures & shares Accounting Year- April to March Pledge of shares to NBFCs as collaterals on line reporting Only Group 1 securities as collaterals loan> 5 lakhs

74 Amendments Participation in Interest Rate Futures Exchanges as clients Participation in Currency Futures Exchanges Credit Default Swaps: NBFCs permitted to buy credit protection to hedge their credit risk against bonds held NBFCs are credit Institutions Credit Information Companies (Regulation) Act, Reporting of secondary market transactions of bonds on FIMMDA platform

75 Amendments Registration of equitable mortgages with Central Registry and with CERSAI.

76 Amendments Prohibition on ---Lending against the security of its own debentures Issue of only secured NCDs including short term NCDs Security creation within a month else proceeds to be kept in Escrow Account (1 month Vs 4 months under the Indian Registration Act)

77 Filings and Disclosures to RBI

78 Filings / disclosures with RBI Deposit taking NBFCs Annual Report within 15 days of AGM, Certificate from Statutory Auditors that all the liabilities in respect of Deposits is reflected in the B/S and the company is in the position to meet the same, Directors Report to contain particulars on unclaimed matured deposits, Statutory Auditors Certificate on continuity of NBFI business, A copy of credit rating obtained on annual basis along with one of the half yearly return on Prudential Norms, NBS 1 Annual Return on Deposits NBS 2 Half yearly return on prudential norms (within 3 months from the expiry of half year), NBS 3 Quarterly Return on Liquid Assets (within 15 days from the close of the quarter), NBS 4 Monthly return of critical parameters by a company holding public deposits. NBS 5 Monetary and supervisory return by NBFC having public deposits of Rs. 20 Crore and above. NBS 6 Monthly return on exposure to capital market (Companies having an asset size of Rs. 100 crores or more) ALM - Half yearly return (PDs >/= 20 cr or asset size >/= 100 cr) Audited balance sheet and auditor s report.

79 Filings / disclosures with RBI NBFC-ND-SI NBS 7 An annual statement of capital funds, risk weighted assets, risk assets ratio Monthly Return on important financial parameters of NBFC-ND-SI ALM NBS-1 Monthly return on short term dynamic liquidity, ALM NBS- 2 Half yearly return on structural liquidity ALM NBS- 3 Yearly return on interest rate sensitivity, Statutory Auditors Certificate on continuity of NBFI business and Passing of Board Resolution for not accepting Public Deposits

80 Filings / disclosures with RBI NBFCs 100 cr. > asset size > 50 cr. Basic information like name of the company, address, NOF. P&L during the last three years has to be submitted quarterly by non-deposit taking NBFCs with the asset size between Rs. 50 Cr and 100 Cr. Filing of Quarterly Return on important financial parameters

81 Corporate Governance

82 Audit Committee. Risk Management Committee monitor asset liability gap, strategize actions to mitigate risks. Nomination Committee to ensure fit and proper status of directors. Board to be apprised of progressive risk management system, policy and strategy followed. Rotation of partners of audit firm: Every 3 years.a suugestion.

83 Fair Practices Code

84 Guidelines on Fair Practices Code To be framed and approved by the BOD of NBFCs Applications for Loans and their processing. Loan application forms necessary info in the interest of the borrower enabling an informed decision. System of giving acknowledgement and setting of time frame for loan disposal

85 Guidelines on Fair Practices Code Loan Appraisal NBFCs should sanction letter containing amount of loan, annualized rate of interest Keep the acceptance of T&C by borrower on its record. Furnish copy of loan agreement with all enclosures, to all borrowers at the time of sanction/disbursement.

86 Guidelines on Fair Practices Code Disbursement, and changes in T&C Notice to borrower in case of changes in any T&C. Recall/accelerate payment or performance to be in consonance with Loan Agreement. Release of all securities on repayment of all outstanding dues or realization thereof.

87 Guidelines on Fair Practices Code General Refrain from intereference in affairs of the borrower except for purposes of T&C in loan agreement. Intimation of consent/objection within 21 days of request of transfer of borrowal account by the borrower. No undue harassment, pestering at odd hours, use of muscle power etc. for recovery.

88 Guidelines on Fair Practices Code Grievance Redressal Mechanism To be set up by the BOD to resolve disputes. Periodic review of the compliance of the Fair Practices Code. Reports of the review to be submitted to BOD at regular intervals.

89 Issue of NCD Directions

90 Issue of NCD directions Corporate Co. as per Companies Act, (including. NBFCs) NCDs- debt instrument issued by any corporate (including NBFCs) Tenure: not < than 90 days--- upto 1 year from the date and limited to the period of credit rating Mode of issue: Private placement Denomination: Minimum Rs 5 lakh in value with a multiple of Rs. 1 lakh

91 Eligibility Criteria Tangible Networth of atleast 4 Crores. WC limit, term loan sanctioned banks/all India financial institutions. Corporate account Standard asset.

92 Rating Requirement Corporate Credit rating from any of CRISIL, CARE, ICRA, Fitch Ratings India Pvt. Ltd. Min Rating P2 of CRISIL or other equivalent.

93 Maturity Maturity >= 90 days from date of issue. Put/Call Option if any after 90 days from issue. Total tenor =< Validity period of credit rating.

94 Limits and the amount of issue of NCDs Aggregate NCD issue not to exceed the lower of Limit approved by the board. Quantum to which the credit rating relates to. Issue to be completed within 2 weeks.

95 Procedure for Issuance Disclosure of financial information to prospective investors. (standard market practice????) Auditors to certify eligibility conditions met. Compliance to Co. s Act, SEBI reg and other regulations. Debenture certificate issued within prescribed period.

96 Debenture Trustee Appt of Debenture Trustee for each NCD issue. DT should be regd with SEBI DT regulations. DT shall submit all such info to RBI as it may require from time to time.

97 Eligible Investors NCDs may be issued to Individuals, Banks, PDs, corporate bodies, insurance companies, MFs, NRIs, FIIs. Investment by PDs and banks subject to approval of respective regulator. Invt. By FIIs within prescribed limits by SEBI. Invt. By banks, PDs, FIs only in demat form.

98 Roles and Responsibilities Corporate comply with guidelines and procedures. Debenture Trustees Within 3 days of closure, submission to RBI - report on issuance details to RBI. - quarterly report on o/s NCDs of upto 1year maturity. - report on defaults in repayment if any

99 Contd Credit Rating Agencies Adherence to code of conduct for CRAs as prescribed by SEBI. Exercise fair discretion determining validity of rating assigned on basis of strength of the issuer. Monitor the rating and revise if necessary from time to time.

100 Impact No issue of debentures for less than 90 days (curbing the widely prevalent practice!!!!!!!!) Issue of unsecured debentures- Deposits?? Acceptance of Deposit Rules to be complied?? Debenture Trustee why if unsecured???? Violation of directions penalties, debarring from NCD market.

101 Private placement of NCDs- NBFCs

102 Companies Act, 2013 Section 42 Rule 14 of The Companies (Prospectus and Allotment of Securities) Rules, 2014

103 RBI Circulars Last update a bane (NBFCs) Validity of Offer document 6 months from the date of Board resolution Minimum investment by a single investor- Rs 25 lakhs or in multiples of Rs 10 Lacs No investors- restricted to 49 and identified upfront End use to be stated Prohibition on lending to group companies, Associates (not applicable to CIC) Resource plan to be in place by September 30, 2013.

104 Companies Act, 2013 Vs RBI (for NBFCs) CA no restriction on the number of persons to whom offer is made RBI- offer restricted to 49 persons CA multiple offers at the same time prohibited RBI- issue purely based on Resource Planning policy CA minimum application size Rs RBI- Rs 25 lakhs or in multiples of Rs 10 Lacs