Prudential Norms for NBFC Non-Deposit Taking
Non-banking financial companies are necessarily regulated & supervised by RBI which is the apex institution for the financial resort.
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 of arrangement or in any other manner, or lending in any manner;
- Such other Non-Banking Institution or class of such institutions, as RBI specifies
Why NBFC’s Exist?
- NBFC Non-Deposit An effective financial intermediary who is regulated & has legal sanctity attached to whatever transaction it undertakes.
- Increasing financial assets & gaining momentum like a small bank
- Customization of service & quicker disbursal
- Innovative products & effective syndication
Indian Financial System Comprises of Three Wings i.e.
- Financial Assets / Instruments
- Financial Instruments
- Financial Markets
NBFC Non-Deposit Further Financial Assets are categorized as Money Market Instruments, Capital Market Instruments & Hybrid Instruments. Financial Market into Forex Market, Capital Market, Money Market, and Credit Market which come sunder Primary & Secondary Market. Financial Intermediaries are categorized into SEBI Registered Merchant Bankers License, PMS, Mutual Funds, Brokers etc.
Income & Accounting 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 is to be recognized on a cash basis, provided income on which right to receipt is established, is to be recognized on becoming due.
- 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
- Every Non-Systemically Important Non-Banking Financial Company is to maintain a Leverage Ratio with a maximum limit of seven.
NBFC License Applicability?
NBFC Non-Deposit 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)
- Financial Income is more than 50% of Total Income (Gross)
Disclosures Requirement for NBFC?
- Every NBFC Should follow Financial Year as accounting year (1st April to 31st 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 recorded in P&L)
- Every NBFC Registration is to disclose a schedule of information in the prescribed format as required under Para 13 of the prudential norms.
- Percentage of Loans against Gold Jewelry 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.
NBFC / RBI Compliance Requirement?
- 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
Prohibitions for NBFC?
- NBFCs are prohibited from lending against its own shares
- 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.
Prior Intimation to RBI?
- 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
Future Growth Prospects?
- Account Aggregator
- FINTECH Lending & business model
- Crypto Currency & Virtual Coining
- Peer to Peer Lending
- Crowd Funding techniques
- On tap licensing of Universal Banks.