RBI tightens regulatory framework for NBFCs on Loans and Advances

Ashish M. Shaji

13 Sep, 2022

On 19^th April, 2022 the Reserve Bank of India notified about certain regulatory changes for NBFCs by amending the circular that it had issued in October 2021 on scale based regulation for NBFCs and regulatory restrictions on lending were notified in respect of NBFCs placed in different layers. These layers include Middle layer, Upper layer and Base layer. The updated norms kicks in from October this year. Let’s look at the key highlights of the RBI notification released in respect of regulatory framework for NBFCs on loans and advances.

Regulatory framework for NBFCs on Loans and Advances: Guidelines applicable to Middle Layer (ML) and Upper Layer (UL) NBFCs –

The regulatory changes were notified in respect of grant of loans and advances to directors, senior officers of NBFC & to the real estate sector.

Loans and advances to Directors

The Reserve Bank stated that NBFCs cannot grant loans and advances aggregating 5 crore rupees or more to the following unless it has been sanctioned by the board of directors/committee of directors:

1. To their own directors (including the Chairman/MD) or relatives of directors;
2. Any firm wherein their directors or their relatives are interested as a partner, manager, employee or guarantor;
3. Any company wherein any of their directors or their relatives are interested as a major shareholder or director or manager or employee or guarantor.

Note- A director or her relatives will be deemed to be interested in a company, being subsidiary or holding company, in case where she is a major shareholder or is in control of the respective holding or subsidiary company.

A director who is directly or indirectly concerned or interested in a proposal must disclose the nature of such interest to the board when such proposal is discussed.

She should recuse from the meeting unless her presence is needed by other directors to elicit information and the director who is required to be present must not vote on any such proposal.

The proposal for credit facility of less than 5 crore rupees to these borrowers can be sanctioned by the appropriate authority in the NBFC under the powers vested in such authority, however the matter needs to be reported to the board.

Loans and advances to the senior officers of the NBFC

The RBI asked NBFCs to abide by the following norms at the time of granting loans and advances to their senior officers:

1. The loans and advances that are sanctioned to the senior officers of the NBFC must be reported to the Board;
2. No senior officer or any committee including a senior officer as a member shall, while exercising the powers of sanction of any credit facility, sanction any credit to a relative of such senior officer. Such credit facility shall be sanctioned by the next higher sanctioning authority under the delegation of powers.

Note– In respect of the grant of loans mentioned above (Loans and Advances to Directors and Loans and advances to senior officers of NBFC), the following should be ensured:

1. NBFCs need to obtain a declaration from the borrower on details of the relationship of borrower to their directors/senior officers for loans & advances aggregating 5 crore rupees and above. If it comes to the knowledge of the NBFC that the borrower has provided a false declaration then such NBFC can recall the loan.
2. These guidelines to be duly brought to the notice of all directors and placed before the board of directors of the NBFC.
3. NBFCs need to disclose the aggregate amount of such sanctioned loans and advances in their annual financial statement.

Loans and advances to Real Estate Sector

At the time of appraising loan proposals relating to real estate, NBFCs need to ensure that the borrowers have secured prior permission from the government/local government/other statutory authorities for the project.

In order to ensure that the process of loan approval is not affected due to this exercise, while the proposals can be sanctioned in the normal course, disbursements can be made only once the borrower has secured all the required clearances from the government or from other statutory authorities, as the case may be.

Note- The RBI has stated that the norms specified by it relating to grant of loans and advances shall apply equally to awarding of contracts.

Here the term- loans and advances shall not include loans or advances against the following:

• Govt. securities;
• Life insurance policies;
• Fixed deposits;
• Stocks and shares;
• Housing loans etc. granted to an employee of the NBFC under any scheme applicable to employees.

Guidelines applicable to Base Layer (BL) NBFCs – Loans to Directors, Senior Officers & relatives of Directors

The RBI^[1] in its notification stated that NBFC must have a Board approved policy on grant of loans to directors, senior officers & relatives of directors & to entities where directors or their relatives have major shareholding. Such board approved policy shall comprise of a threshold beyond which loans to the persons mentioned above shall be reported to the board. Further, NBFCs will be required to disclose in their Annual Financial Statement, the aggregate amount of the sanctioned loans and advances.

Conclusion

RBI had revised regulatory framework for NBFCs in October 2021 as it felt there was a need to align the regulatory framework for NBFCs considering their changing risk profile. NBFCs were classified based on their size and perceived risks. Now the RBI has revised October 2021 circulars on scale-based regulations.

Read Our Article: RBI announces Revised Regulatory Framework for NBFCs