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Prudential Norms for NBFC Non-Deposit Taking

Narendra Kumar

| Updated: Feb 20, 2018 | Category: NBFC

NBFC Non-Deposit

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?

  • Takeover/Acquisition/Mergers/Amalgamation
  • 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.

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Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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