NBFC Prudential Norms & Compliances Important Aspects Bombay Chartered Accountants Society CA Bhavesh Vora
Coverage Existence of NBFCs Last Decade of NBFC Banks Vs. Non-Banks Meaning of NBFCs Major Changes in 2007-08 Recent Developments Applicability and Issues Public Funds Vs. Public Deposits Income Recognition Accounting as per Prudential Norms Asset Classification and Provisioning Capital Adequacy Leverage Ratio 2
Coverage (Contd.) Loan against Shares Credit Concentration Norms Restructuring of Advances Disclosures to be made Submissions to RBI Policies and Committees Corporate Governance Restrictions on Investments Prohibitions Change in Control Penal Provisions Miscellaneous Compliances Future of NBFC Sector 3
Financial System Financial Assets/ Instruments Financial Markets Financial Intermediaries Forex Market Capital Market Money Market Credit Market Primary Market Secondary Market Money Market Instrument Capital Market Instrument Hybrid Instrument 4
Companies (Registered under Section 2(20) of the Companies Act 2013) NBFCs Registered with RBI * Regulation, Supervision, Surveillance & Enforcement under RBI NBFC Regulated by Other Regulators Type of Financial Institutions Housing Financial Inst. Merchant Banking Co, Venture Cap Fund Co, Stock Broking, CIS Nidhi Companies, Mutual Benefit Co Chit Fund Companies Insurance Companies Authority for Regulation, Supervision. Surveillance & Enforcement National Housing Bank SEBI MCA State Govt. IRDA Non Banking Non Financial Companies Regulation, Supervision, Surveillance under the Companies Act 2013. Regulator: Ministry of Corporate Affairs (MCA) Enforcement Agency : State Governments 5
Existence of NBFCs Effective Financial Intermediary Earlier there were no entry norms and no requirement for compulsory registration Amendment related to compulsory registration came in January 1997 Various Norms prescribed Prudential Norms Auditor s Direction Prohibition on Acceptance of Deposits, etc 6
Last Decade of NBFC Qualitative changes in functioning Effective Financial Intermediation Customization of Service and quicker decisions Innovative Products Increasing Financial Assets and becoming like a small Bank Gaining Sectoral Importance 7
Banks Vs. Non-Banks Both are Financial Intermediaries Banks can: Maintain Demand Deposits (Savings/Current A/c) Form a part of Payment and Settlement Mechanism Non-Banks can: Accept only Term Deposits Does not form part of Payment and Settlement Mechanism 8
Meaning of NBFC As per Section 45-I(f) of the RBI Act, 1934 Non Banking Financial Company means 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 RBI specifies Non-Banking Institution - means a company, corporation or co-operative society. 9
Major Changes in 2007-08 Non-Banking Financial (Non- Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 Non-Banking Financial Companies Auditor s Report (Reserve Bank) Directions, 2008 Additional obligation to NBFC-ND Introduction of Systemically Important NBFCs (ND-SI) 10
Recent Developments (2015) New prudential norms and revamp of old directions related to SI and Non-SI NBFCs based on regulatory framework issued in November 2014 (27 th March, 2015) Systemically Important NBFC (Non-Deposit Accepting or Holding) Companies Prudential Norms, 2015 Non-Systemically Important NBFC (Non-Deposit Accepting or Holding) Companies Prudential Norms, 2015 Corporate governance directions 2015 introduced (10 th April, 2015) Master Circular dated 03 rd June 2015 and 11 th June 2015 on prudential norms for Non-Systemically and Systemically Important NBFCs respectively. Exemption to specified NBFCs from Credit Concentration Norms 11
Very Recent Developments (Contd.) Classification of NBFCs into Type-I (No Public Funds and Customer Interface) and Type-II (Public Funds and Customer Interface) Submission of Application at Central Office KYC Directions, 2016 12
Public Funds Vs. Public Deposits Public Funds include funds raised directly or indirectly through: Public Deposits Commercial Papers Debentures Inter-Corporate Deposits Bank Finance And exclude: Public Funds Public Deposits Funds raised by issue of compulsory convertible instruments within a period not exceeding five years from the date of issue 13
Systemically and Non-Systemically ND- NBFCs Particulars Non-Systemically Important Systemically Important Asset Size Less than Rs. 500 crores Rs. 500 crores and Above Not Accessing Public funds Exempt from observing Prudential Norms, 2015 (Except Annual Certificate) Exempt from Credit Concentration Norms Relevance of Last Audited Balance Sheet NOF for NBFCs Rs. 200 Lakhs (Registered/Applied after 20 th April 1999) Rs. 100 Lakhs by 31 st March 2016 Rs. 200 Lakhs by 31 st March 2017 Asset Size of the Group Companies to be clubbed 14
Applicability In order to identify a particular Company as NBFC, the Asset-Income Pattern of the last audited Balance Sheet is to be considered for the principal business criteria Financial Assets are more than 50% of Total Assets (Net of Intangible Assets) AND Financial Income is more than 50% of Total Income (Gross) Fixed Deposits with banks are not considered Financial Assets 15
Issues experienced Issues of 50%-50% Criteria Profit and Loss A/c not maintained Derivative Trading Commodity Trading Continued Adherence Investment in Partnership Firms (for Deemed NBFCs) Issues of Net Owned Deduction of Investment in Group Companies for Credit Concentration Norms 16
Applicability of Prudential Norms NBFC-ND-NSI (Asset Size below 500 Crores) Non-Systemically Important Non-Banking Financial (Non- Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 NBFC-ND-SI (Asset Size above 500 Crores) Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 NBFC-D (Deposit Accepting NBFCs) Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 17
Income Recognition The Income of an NBFC should be recognized as per the Accounting Principles Income on Non-Performing Assets (NPA) is to be recognized only on realization Any such income recognized before the Asset becomes NPA should be reversed Income on investments are to be recognized on cash basis, provided income on which right to receipt is established, is to be recognized on becoming due 18
Accounting Accounting Standards (AS) are to be followed unless they are inconsistent with prudential norms Every NBFC is to frame an Investment Policy as per the applicable prudential norms for accounting of investments Investments are to be classified as current or long-term at the time of making such investment Inter Class transfer on ad-hoc basis not permitted Quoted Current Investment Cost or Market Value Unquoted Equity Shares Cost or Breakup/Fair Value Unquoted Preference Shares Cost or Face Value 19
Asset Classification Every NBFC has to classify its lease/hire purchase assets, loans and advances and any other forms of credit into: Standard Assets Sub-Standard Assets Doubtful Assets Loss Assets The Class of Assets cannot be upgraded merely upon rescheduling (Unless it satisfies conditions for upgradation) 20
Provisioning Requirements The NBFCs are to provide for the assets classified in the following manner: Standard Assets 0.25% (For NSI) 0.3% (0.25%-0.4%)(For SI and NBFC-D) Disclosed as Contingent Provisions against Standard Assets Sub-Standard Asset 10% Doubtful Assets (Secured Portion) Upto one year 20% One to three years 30% More than three years 50% Doubtful Assets (Unsecured Portion) 100% Loss Assets 100% 21
Additional Provisioning Additional Provisioning is required for Hire Purchase and Lease Assets (On net book value) HC/LR overdue upto 12 months 0% HC/LR overdue between 12-24 months 10% HC/LR overdue between 24-36 months 40% HC/LR overdue between 36-48 months 70% HC/LR overdue for more than 48 months 100% On expiry of a period of 12 months after the due date of the last installment of hire purchase/ leased asset, the entire net book value shall be fully provided for (HC/LR = Hire Charges or Lease Rentals) 22
Capital Adequacy Particulars NBFC-ND-SI NBFC-ND-NSI NBFC-D Capital Ratio to Riskweighted/Adjusted Ratio Limit Tier II to Tier I Capital Ratio Limit Tier I Capital not to exceed 15% 15% (Only for MFI and IFC) 100% (Only for MFI) 8.5% by M16 10% by M17 100% (Only for MFI) 10% (Only for IFC) 15% 100% (Only for MFI) 8.5% by M16 10% by M17 23
Leverage Ratio Every Non-Systemically Important Non-Banking Financial Company is to maintain a Leverage Ratio with a maximum limit of seven Note: Leverage Ratio is the Ratio of Outside Liabilities to Owned Funds 24
Loan Against Shares NBFCs having asset size above Rs. 100 Crores and lending against collateral of shares have to: Maintain LTV of 50% at all times. Lowering of LTV due to price fluctuations is to be made good within 7 working days For lending for investment in capital markets, only Group 1 securities can be accepted as collateral for value of loan above Rs. 5 lakhs Report online to stock exchanges on quarterly basis the information of shares pledged in the prescribed format 25
Credit Concentration Norms NBFC-SIs accepting public funds and NBFC-Ds cannot Lend to: A single borrower in excess of 15% of Owned Funds A single group of borrowers in excess of 25% of Owned Funds Invest In: Shares of another Company in excess of 15% of Owned Fund Shares of single group of companies in excess of 25% of Owned Funds Lend and Invest: In excess of 25% of Owned Fund to a single party In excess of 40% of Owned Fund to a single group of parties 26
Credit Concentration Norms (Contd.) Such Ceiling on Credit/Investment is not applicable to: Investment in equity shares of insurance company upto the extent permitted by RBI Investments/Loans to Companies in the Group to the extent they are deducted from Owned Funds to arrive at Net Owned Funds (NOF) Applicable NBFCs are to formulate a policy in respect of exposures to a single party/single group of parties 27
Restructuring of Advances Date of Completion and Date of Commencement of Commercial Operations Division of Loans into Infrastructure and Non-Infrastructure Sector Infrastructure Loan classified as NPA Infrastructure Loans delayed for reasons beyond the control of promoters Mere extension of DCCO not considered restructuring Provisioning to be done as per the guidelines 28
Disclosures Every NBFC Should follow Financial Year as accounting year (1 st April to 31 st March) Prior approval of RBI is required for following any other accounting year Provisioning made for the credit assets should be disclosed separately without netting it Such provisions should be separate from depreciation and should not be an appropriation (i.e. to be recoded in P&L) Every NBFC is to disclose a schedule of information in prescribed format as required under Para 13 of the prudential norms 29
Disclosures (Contd.) Additionally, NBFC-SIs are to disclose: Capital to Risk Assets Ratio Exposure to Real Estate Sector (Both direct and indirect) Maturity pattern of Assets and Liabilities Percentage of Loans against Gold Jewellery to Total Assets is to be disclosed if such loans are advanced Restructured Loans are to be disclosed in the prescribed format Disclosures under Corporate Governance Norms 30
Submission of Information Every NBFC has to communicate to Regional Office of RBI changes in the following within one month from such change: Communication Details like Address, telephone number etc. of registered Office Names and Residential Address of Directors Names and Official Designations of its Principal Officers Names and Office Address of Statutory Auditors Specimen Signatures of authorized officers 31
Submissions to RBI NBFC-ND-SI NBS7 Quarterly (Online) NBS-ALM1 Monthly (Online) NBS-ALM2 Half-Yearly (Online) NBS-ALM3 Half-Yearly (Online) Branch Info Return (Online) Statutory Auditors Certificate Annually (Online) Foreign Direct Investment Position Half-Yearly (Even if there is no foreign funding) (Regional Office) Overseas Direct Investment Position Quarterly (Only if there is overseas investment) (Regional Office) Board Resolution for Non-Acceptance of Public Deposits 32
Submissions to RBI NBFC-ND-NSI NBS8 Yearly (For NBFC ND having asset size between 100 to 500 crores) (Online) NBS9 Yearly (For NBFC ND having asset size below 100 crores) (Online) Branch Info Return (Online) Statutory Auditors Certificate Annually (Online) Board Resolution for Non-Acceptance of Public Deposits 33
Policy on Demand/Call Loans Every NBFC intending to grant demand/call loans should frame a policy and implement it The Policy should include: Cut-Off date Rate of Interest Interest Payable at monthly or quarterly rests Cut-Off date for performance review of loans (Not exceeding six months from date of sanction) 34
Fair Practices Code Loan Documentation Application and Processing Loan Appraisal and Terms and Conditions Language of Documentation / Communication Recovery of Loans System of not charging excessive interest Grievance Redressal Officer 35
Committees Every NBFC-ND-SI and NBFC-D are to formulate the following committees: Audit Committee Nomination Committee Risk Management Committee 36
Corporate Governance Norms Every NBFC-ND-SI and NBFC-D shall: Frame internal guidelines on corporate governance Frame a Fit and Proper Policy Rotate partners of CA Firm every 3 years and ensure the retiring partner completes the cooling off period of 3 years before re-appointment 37
Prohibitions NBFCs are prohibited from: Lending against its own shares NBFC-D is prohibited to make investments or give loans if it has defaulted in repayment of any deposit and for as long as such default exists All NBFCs are prohibited from becoming partners in Partnership Firms Further NBFCs require prior approval from RBI For opening branches in excess of 1000 in number 38
Change in Control Prior Approval from RBI Takeover/Acquisition/Mergers/Amalgamation Before approaching the court Resulting in acquisition/transfer of shareholding of 26% or more Resulting in change of management of 30% or more Progressive change over time Public Notice of one month Intimation of all the changes are to be communicated 39
Penal Provisions of RBI Act 1934 Broad Heading Doing NBFI Activities without CoR Non-Compliance of RBI Directions Failure to produce documentation or answer queries Acceptance of Deposits Penalty Imprisonment of 1 to 5 years AND Fine of Rs. 1 to 5 lakhs Imprisonment upto 3 years Fine which may extend to Rs. 2000 per offence and in case of continuous noncompliance, additional fine upto Rs. 100 per day from the first offence Imprisonment upto 3 years AND Fine of twice the amount received Reference of Section 58B (4A) 58B (5) - (a) & (b) 58 (B) (2) 58(B) (5A) 40
Miscellaneous Compliances Membership of all Credit Information Companies Core Investment Companies submission of annual auditor s certificate under CIC Directions 2011 Transfer to Statutory Reserve U/s 45-IC 41
Future of NBFC Sector Peer to Peer Lending Crowd Funding Operational Business Models KYC Issues Account Aggregator Only NBFC AA Exemption to Regulated entities Prohibition form conducting any other business Cannot support transactions in financial assets On Tap Licensing of Universal Banks Eligible Promoters Fit and Proper Criteria Minimum Capital Requirement Corporate Governance, Prudential and Exposure Norms 42
NBFC Prudential Norms & Compliances Important Aspects Bombay Chartered Accountants Society CA Bhavesh Vora