Revised Regulatory Norms for NBFCs as Notified by the Reserve Bank of India!

A nonbanking financial institution is a type of financial institution that is not governed by any regulatory banking authority, nationally or internationally and an NBFC does not have any banking license as well. A non-banking financial institution[1] specializes in offering bank associated financial services such as market brokering, contractual savings, risk pooling as well as investment and other such bank-related services. They are also involved in the business of hire purchase, loans, securities, chit business, and bonds, etc.

Non-Banking Financial Companies (NBFCs), governed by the Companies Act, 2013, are institutions that provide services in the financial sector. Although NBFCs are prohibited from providing banking services such as accepting demand deposits, issuing of cheques and bank drafts, etc., they are outperforming banks regarding providing personal loans. They had grown from 10.7 percent of the banking assets in 2009 to 14.3 percent in 2014. The main reasons are faster disbursal of loans, coverage of expenses such as stamp duty and registration costs, less stringent paperwork, and eligibility norms.

Revised NBFC Regulations by RBI

New norms had been notified by the Reserve Bank of India (RBI) in 2015 for the regulation of NBFCs, setting stringent rules related to minimum net owned funds, deposit acceptance ratio, capital norms, asset classification rules, corporate governance, etc. It had been done to ensure that sources of credit remain stable and to widen the financial market.

As per the revised norms, NBFCs that were operational before April 1999 are required to raise their minimum NOF or net owned funds to Rs 1 crore by March 2016, and to Rs. 2 crores by March 17, from the previous requirement of Rs. 25 lakh. NBFCs failing to achieve the current ceiling will not be eligible to hold the Certificate of Registration.

The period for declaring a loan as bad debt has been brought down from six to three months, the same as that of the banks. There has been a rise in the provisions for standard assets from 0.25 percent to 0.40 percent of loans outstanding.

It is also mandatory for deposit-taking NBFCs to get an investment-grade rating by March 2016. All asset financing NBFCs can accept deposits up to 1.5 times their NOF. The cut-off for being considered systematically important has been raised for non-deposit taking NBFCs from Rs. 100 crore worth of asset to Rs. 500 crore. Such NBFCs have also been asked to streamline the core capital adequacy ratio of 10 percent, which was previously between 7.5 to 12 percent.

As per the latest reforms, an NBFC registering as NBFC-Factor is required to ensure at least 50 percent of its total assets as financial assets. It also has to make sure that its income from the factoring business is not less than 50 percent of its gross income.

NBFCs that are floated by a group of promoters or are a part of a corporate group will not be viewed as a standalone. Enhanced prudential regulations have to be made applicable to NBFCs wherever public funds are accepted, and conduct of business regulations has to be made applicable in the case of involvement of customer interface. For all hire-purchase, loan and lease assets, the doubtful asset would be considered as an asset that has remained sub-standard for a period exceeding 16, 14 and 12 months for the financial years ending March 31, 2016, 2017 and 2018 respectively. NBFCs with Rs. 500 crores or more asset size are exempted from the requirement of maintaining Capital to Risk Asset Ratio (CRAR) and complying with credit concentration norms.