Non-Banking Finance Companies- India

1.0  Introduction NBFCs are companies that are registered under the Indian Companies Act, 1956, and doing function akin to that of Banks, with a few differences. It is necessary that every NBFC should be registered under Sec 45-1A of Reserve Bank of India Act, 1934. The RBI Act, as amended in 1997, provided a comprehensive regulatory frame work for NBFCs, particularly Chapter 3-B, 3-C and 5 of the Act with primary objective of putting in place a comprehensive regulatory and supervisory frame work, aimed at protecting the interest of depositors as well as ensuring the sound functioning of NBFCs (Working Group on the issues & concerns in the NBFC sector ---Report & recommendations –RBI August 2011). The Regulatory Frame work includes:- 1) To issue directions to companies and its auditors. 2) Prohibit deposit acceptance and alienation of assets by companies. 3) Initiate action for Winding-Up of companies. 4) Compulsory registration with RBI for commencement of business. 5) Minimum entry point norms. 6) Maintenance of a portion of deposits in liquid assets. 7) Creation of reserve fund and transfer of 20% of profit after tax but before divided annually to the fund. 8)Directions as to:- a) acceptance of public deposits , b) Prudential norms like capital adequacy , income recognition, asset classification , provisioning for bad and doubtful assets, exposure norms and other measures, c) directions to statutory auditors / BODs/ Shareholders. 2.0 NBFC Definition & Classification  NBFC is defined u/s 45-I (f) r/w Sec 45-I (c) of the RBI Act, 1934. The classifications are based on activity, size and Liability. Liability based classification: - A Category – NBFC s having public deposits (NBFCs-D) and B-Category NBFCs not having public deposits (NBFCs –ND). Activity based classification: - Investment Company (IC); Loan Company (LC), Asset Finance Company (AFC), Infrastructure Finance Companies (IFC). Size based classification:-Systematically Important Core Investment Companies (CIC-ND-SI)-with assets of Rs 100 Cr. and above. The other categories of NBFC are:-Mutual Benefit Financial Company ( eg:- Nidi Company), Mutual Benefit Company ( MBC), Miscellaneous Non-Banking Co. ( MNBC)( eg:-Chit Fund Co. ), NBFC-Micro Finance Institution ( NBFC-MFI).  3.0 Source of Funds for NBFCs  As per RBI Working Group Report August 2011, own funds constitute 25.9% of funds; Debentures constitute 22.2%, Bank borrowings 21%, Commercial papers 4%, Inter-corporate borrowings 3.1%, Public Deposits 0.5%, and Others 23.4%. Debentures & Bonds:-In India, the terms ‘Corporate Bonds’ and ‘Debentures ‘are interchangeably used. Though different countries have different interpretations of both the terms, “Corporate Bonds’ and Debentures’ in Companies Act, 1956, Se. 2(12), identifies both as same. Secured Debentures are debt instruments and are regulated by SEBI, and do not come under the definition of ‘Public Deposit’ in terms of NBFC Acceptance of Public Deposits( Reserve Bank) Directions, 1988. 4.0 Types of NBFCs Multiple NBFCs:  There are many Corporate which have multiple NBFCs within the group, for eg:- M/s Shriram Group. As such each of these NBFCs served different purposes; and the reason behind the same are operational efficiencies, dynastic reason, tax planning e.t.c. The Regulators are, however, of the opinion that, the multiple NBFCs should not be viewed on a stand-alone basis, but should be viewed in aggregate. Captive NBFCs: - A captive NBFC is one where a major portion of its portfolio in receivables is generated by the sales of products and services of the parent or the group. It functions as an extension of a corporate marketing activity. In most cases, captives operate as a core but separate subsidiary of the parent and in some cases as distinct operating Division. Regulators are of the opinion that a higher cushion of capital than for normal NBFCs may be warranted for captives. Government NBFCs: - There are a number of Governmental NBFCs, which fall within the ambit of RBI Regulations. The Government Department or the Ministry or the Bureau of Public Enterprises to which such companies are attached, are expected to prescribe the norm for their operation on healthy lines and monitor their financial health. Being government companies, they are of no supervisory concern to RBI. 5.0 Supervisory Framework under RBI  The supervisory framework for NBFC in India was created in 1997 with the object of protecting the interest of the depositors. The existing framework for supervision of NBFCs consists of:- a) Off-site supervision involving scrutiny of periodical returns and statements containing financial and prudentially important data submitted by the NBFCs. b) On –site supervision of the books of accounts and other records of the NBFCs. This is done on the basis of assessment and evaluation of CAMELS (Capital, Assets, Management, Earning, Liquidity, and System & Procedures). 6.0 NBFC Prudential Norms  The RBI has issued detailed direction as to prudential norms; vide NBFC Prudential Norms (Reserve Bank) Directions, 1988. Asset Classification: - Standard Asset / Sub Standard Asset / Doubtful Asset / Loss Asset. Provisioning Norms( Loans & Advances):- Standard Asset –No provision ; Sub-Standard Asset -10% of the outstanding balance Doubtful Asset –on unsecured portion 100% and on secured portion 20 / 30 and 50% depending on the age of the doubtful assets. Los Asset – 100% of the outstanding. Provisioning Norms (Equipment Lease & HP):- Non-Performing Asset (NPA) for 12 months -10% is provisioning; 24-36 months NPA – 40% provisioning; 36-48 months NPA 70% provisioning; and 48 months plus NPA- – 100% provisioning. In terms of Directions, the NBFCs accepting / holding public deposits have to ensure maintenance of minimum prescribed capital to risk-weighted assets ratio ( CRAR)at all times. 7.0 Liquidity Requirement for NBFCs  The RBI stipulates a statutory liquidity requirements ( SLR) at 15% of aggregate deposits on a daily basis to NBFC. Also, ALM – Asset Liability Management –guidelines have been made applicable to NBFC –Ds with deposits of Rs 20 crore and above. The ALM guidelines have been made applicable to NBFC-Ds with deposits of Rs 20 Cr. and above. 8.0 Acceptance of Deposits by NBFCs NBFCs can accept deposits for a minimum period of 12 months and maximum up to 60 months, for RNBCs the maximum period is up to 84 months, and for MNBCs (Chit Funds), minimum period is 6 months and maximum period is 36 months. Ceiling on Deposit Rate:-NBFC s / MNBCs / Nidhis -----------11% per annum; RNBCs –4 to 6 %. 9.0 Regulatory Convergence:-between Banks & NBFCs-D- the emerging scenario. Regulation of NBFCs by RBI started from the year 1964, and as day passes, and to control Deposit accepting NBFCs, the regulators and supervisory framework of RBI is converging to that of Banks. Internationally regulations for deposit acceptance are similar for all entities accepting deposits, whether Banks or NBFCs. As such, the RBI working Group.