ENHANCED REGULATORY FRAMEWORK FOR NBFC’S IN INDIA
With a view to sync regulatory framework with the considerable developed NBFC’s and to mitigate the risk faced by the NBFC’s, RBI has issued a circular on 10thNovember, 2014 to make changes in the regulatory framework of the NBFC’s.
The changes contained in the circular are focuses on regulating activities which are systemically important for NBFC’s.
As a exercise of gap analysis of NBFC regulations, we have tried to summaries the highlights of the revised regulatory framework, which are as follows:-
1. To support the financial sector and technology adoption and due to rising difficulties of services offered by NBFCs, it shall be compulsory for NBFCs to achieve a minimum NOF of Rs. 2 crore by end of March, 2017, as per the target given:- a) Rs. 1 crore by 31stMarch, 2016; b) Rs. 2 crore by 31st March, 2017.
2. NBFC have been divided in following categories:
a) NBFC- D
b) NBFC- ND – Assets Less than Rs. 500 crore
c) NBFC- ND-SI – Assets of Rs. 500 crore and above
3. NBFCs having NOF below Rs. 2 crore shall submit a certificate of statutory auditor that they will achieve the revised target by the end of financial years as given above.
4. Bank will start the procedure for cancellation of certificate of registration of NBFCs which are not able to achieve the prescribed level within the given time period.
5. Existing Unrated Asset Finance Companies to get Investment grade by March, 2016 else they cannot renew existing or accept fresh deposits thereafter. In the meanwhile these Unrated AFCs can only renew their existing deposits on maturity.
6. The limit for acceptance of deposit has been reduced from 4 times to 1.5 times of Net Owned Fund for rated AFCs.
7. The threshold which defines the importance of NBFCs-ND has been increased to Rs. 500 crore and above from Rs. 100 crore as per the latest audited balance sheet. NBFCs – ND will now categorize into two categories:- a) NBFCs –ND whose assets are less than Rs. 500 crore and b) NBFCs –ND whose assets are of Rs. 500 crore and above
8. To determine whether NBFCs falls under category of NBFCs-ND, cumulate total assets of NBFCs in a group including NBFCs taking deposit and due to this rationale, statutory auditor will be require to certify the asset size of all the NBFCs in the group.
9. Improved prudential regulation shall be applicable to NBFCs – ND with an asset of less than Rs. 500 crore which are as follows:- a) NBFCs which have not access to public funds and in which customers do not interfere, will not be subject to any regulation. b) NBFCs in which only customers interfere will subject only to conduct of business regulations c) NBFCs which accepts only public deposit will subject to limited prudential regulation d) NBFCs which accept public deposit and in which customers interfere are subject to both the regulations given above e) Registration under section 45 IA is compulsory for every NBFCs
NBFCs – ND with assets of Rs. 500 crore and above shall comply with prudential regulation as applicable to NBFCs –ND SI.
10. Exemption granted from maintaining CRAR and complying with Credit Concentration Norms to NBFCs- ND with assets of Less than Rs. 500 crore.
11. Maintain Minimum Tier 1 capital of 10% by all NBFCs – ND with assets of Rs. 500 crore and above and all NBFCs – D.
12. The asset classification norms for NBFCs –ND-SI and NBFCs – D are sync with that of banks upto 31stMarch, 2018 in a phased manner.
13. The condition for standard assets for NBFCs-ND-SI and for all NBFCs-D, is raised to 0.40% in a phased manner ending 31/03/2018.
14. The credit concentration norms for AFCs are now being sync with other NBFCs. Excluding already sanctioned loans it will be applicable to all new loans with immediate effect
15. Modifications in Corporate Governance Guidelines: – NBFCs – D with deposit of Rs. 20 crore and above and NBFCs – ND with asset size of Rs. 50 crore and above shall constitute Audit Committee.
16. The constitution of the three Board Committees and instructions with regard to rotation of partners are applicable to all NBFCs-ND-SI and NBFCs-D. Audit Committee of NBFCs-ND-SI, as also all NBFCs-D must ensure that an Information Systems Audit of the internal systems and processes is conducted at least once in two years to assess operational risks.
17. Few additional requirements have been laid for directors, which shall be applicable to all NBFCs-ND-SI and all NBFCs-D, w.e.f. March 31, 2015.These include there is a fit and proper criteria at the time of appointment of Directors and on a continuing basis. Declaration and Undertaking shall be obtained from Directors and directors shall sign a Deed of Covenant. NBFCs shall furnish to the Reserve Bank a quarterly statement on change of Directors certified by the auditors and a certificate from the Managing Director that fit and proper criteria in selection of directors have been followed and theses statement shall reach to Reserve Bank within 15 days of the close of quarter.
18. All NBFCs-ND-SI and all NBFCs-D shall additionally disclose the following in their Annual Financial Statements, with effect from March 31, 2015: a) Registration/ licence/ authorisation obtained from other financial sector regulators; b) Ratings assigned by credit rating agencies and migration of ratings during the year; c) Penalties, if any, levied by any regulator etc
19. NBFCs-ND, with assets less than Rs. 500 crore, including investment companies, shall required to submit a simplified Annual Return.