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On 19th 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.
The regulatory changes were notified in respect of grant of loans and advances to directors, senior officers of NBFC & to the real estate sector.
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:
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.
The RBI asked NBFCs to abide by the following norms at the time of granting loans and advances to their senior officers:
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:
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:
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.
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
Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on corporate law. He is a creative thinker and has a great interest in exploring legal subjects.
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