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NBFC Concerns: What are the Major Concerns of NBFC Sector

Tanya Verma

| Updated: Aug 03, 2019 | Category: NBFC

major concerns of the NBFC sector

NBFC sector faces various issues and challenges in their functioning. There are some major concerns of the NBFC Sector such as; the NBFC has to register itself with all four CICs like any other Credit Institution like a Bank and if it does not become a member, it becomes a cause of concern. Also, we will see how they can avoid any disruptions in their working by following the prescribed guidelines. Furthermore, in this blog, we are going to see some common concerns of the NBFC sector and what are the guidelines set by the concerned regulatory bodies.

Common Concerns of the NBFC Sector

Below mentioned are some of the concerns of the NBFC sector.

Concern 1: NBFC Sector not registered with all 4 CICs

  • 4 CICs

The RBI has made it mandatory for all Credit Institutions including NBFCs to become a member of all of the four Credit Information Company {CIC} viz. Credit Information Bureau {India} Limited, Equifax Credit Information Services Private Limited, Experian Credit Information company of India Limited, CRIF High Mark Information Services Private Limited. These CICs may seek and obtain credit information from its members.

  • Norms:

According to RBI, all Credit Institutions should become a member of all CICs, within three months of coming out of the directive stating these rules. Furthermore, all the CICs are directed to keep in its records the credit information, update it on a monthly basis, or on intervals as mutually agreed by both the parties.



Also, Read: Revision of KYC norms for FPIs (Foreign Portfolio Investors) by SEBI



Concern 2: NBFC Sector not registered with CKYCR

  • Central KYC Registry

CKYCR is the central repository of the KYC details of the customers for the financial sectors having KYC norms installed within the organization. It is used with the objective to reduce process and therefore, the burden of producing KYC documents and verifying it every time a new customer signs up with the financial sector.

  • Norms:

It is compulsory for NBFC to register with CKYCR. It is mandatory for all Regulated Entities like NBFCs to follow the KYC norms. Other Regulated Entities {REs} include, scheduled Commercial Banks, Financial Institutions, Non-Banking Financial Institutions, and all Payment System Providers, agents of Money Transfer Service Scheme, etc.



Concern 3: NBFC not taking Prior Approval from RBI to Change Name

  • Prior approval from RBI for change in name of NBFC

RBI observed that numerous NBFCs were changing their names without intimating the Bank. Many were adding the “InfoTech” suffix to take the accompanying advantages.

  • Norms:

It is advised by the RBI and made mandatory to intimate the regulatory body in case the NBFC change its name due to any reason. It is necessary for any NBFC to take prior permission from RBI for making any changes its name to avoid any misuse associated with it.

Any NBFC which is not complying with these rules is liable for a punishment for the violation of these directions. This punishment may be a cancellation of the Certificate of Registration in case it is already registered or rejection of the Application for Registration if not registered.



Concern 4: NBFCs need to show its Sources of Funds

  • Source of Fundings

NBFCs unlike banks do not rely on Current Account Savings Account {CASA} as a source of income. They need to seek alternative sources of funding.

  • Norms:

The business activities permitted to NBFCs by the RBI are; loans and advances, acquisition of shares, bonds, stock, insurance business, or hire-purchase, etc. The NBFCs need to report to the RBI about its source of funding.



Concern 5: Not Sticking to the KYC Guideline

  • KYC

KYC or Know Your Customer is an international benchmark used to frame Anti Money Laundering rules and combating the financing of terrorism policies by the regulatory bodies.

  • Norms:

All NBFCs are advised to perform practices according to these guidelines and ensure the formulation of “Know Your Customer” and anti-money laundering measures within the organization with taking proper approval from its Board.



Concern 6: Not following the Credit Exposure Limits (Especially in case of Single Borrowers and Real Estate Sector)

  • Credit Exposure Limit

The lender makes available some limited amount of credit to the borrower by the lender, this is called Credit Exposure Limit. It indicates the extent up to which a lender is exposed to the risk of loss in case of defaulting borrower.  

  • Norms:

As per the RBI’s guidelines, the Single Borrower Limits set to 15% which earlier was 10% for NBFCs which do not finance infrastructure stands. 



Concern 7: Not Adhering to the Leverage Limit

  • Leverage Limit

Leverage Ratio is defined as the total outside liabilities of net owned funds by the RBI[1]. Leverage Limit is the limit set on the extent for providing Leverage Ratio. It is to assess the ability of the company to meet its financial obligations.

  • Norms:

The RBI has set the Leverage Limit to 7 stating any NBFC must not exceed this limit. This is in effect from 31st March 2015.


Our Recommendation: SEBI Proposed Strict Norms for Disclosure of Auditors of Listed Companies



Concern 8: Poor Record Keeping and the inability to produce a record on demand


  • Accounting Standards

Poor record or bookkeeping can be an agenda for the loss of any company. It can lead to loss of time, decrease inefficiency, and can cause unnecessary stress. And it is taken if there is a failure in record keeping the management won’t be able to present in time its records on demand.  

  • Norms:

According to the new Indian Accounting Standards {IAS} norms (as on 2018) all NBFCs including housing finance companies have to set aside more amounts as the provision which impact their bottom line. Now the loan-loss provisioning norms should be built on the Expected Credit Loss {ECL} Model based on the judgments and the past trends of individual entities. It is applicable for NBFCs having net owned funds over Rs. 500 crores.



Concern 9: Using Aggressive Marketing Tactics with Low-Quality Manpower

  • Advertising

The RBI has set some rules related to Advertisement by any NBFC. NBFCs can use the method of Advertising for promoting their businesses or sell different services.

  • Norms:

The RBI has set that all the advertisements by any NBFC must contain the following;

  • The real rate of return in forms such as interest, premium, bonus, etc.
  •  The mode of repayment of the deposit
  • The maturity period of the deposit
  • The rate of payment to the depositor in case of premature withdrawal
  • All the terms and conditions related to deposit renewal
  • Also should mention that the deposits are not insured
  • Any other special feature related to the terms and conditions of the acceptance of the deposit

Other Concerns

  • NBFC not taking prior approval in a change of control and management
  • Submission of incomplete documents while applying for prior approval
  • NBFC not providing a copy of Loan agreement to the borrower, interest rates not mentioned in the annualized form, no display of grievance redressal matrix in branches and official website
  • No intimation in case of change of management where RBI’s prior approval is not needed, within 30 days
  • Not publishing a public notice in case of change of control
  • NBFC Sector is not present at the Registered Address
  • NBFC’s delayed reply to correspondence sent by the RBI
  • The correspondence Email ID of the company should be the same as registered with the MCA
  • The NBFC does not intimate any change in statutory auditor

Conclusion

There are some concerns in the NBFC sector. Every Non-Banking Financial Institutions and other related institutions must know these concerns. It is recommended to ensure they file necessary compliances on time, follow all the guidelines sent by their respective regulatory body and hence, run effectively and avoid any penalties or charges against them.

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Tanya Verma

Tanya is working as writer & editor from past 2 years with experience in covering startup and technology related topics.

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