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The paper speaks about the regulatory framework for an NBFC. RBI has been regularly changing the structure of the NBFC. It is pertinent to mention that NBFCs has seen a growth of 12% compared to the traditional banks. NBFCs have reached quarter the size of banks.
Table of Contents
The regulatory framework for NBFC has been implemented from 2006. It was established with regulations about its size and restrictions on the financial service. Through this lenient regulatory framework for NBFCs, they can captivate in other geographical regions, extending its products and ease of financial business.
The regulatory framework for NBFC has been introduced in 1964. This was introduced in the chapter II-B of RBI Act, 1934. To regulate the NBFC, the RBI has vested the power in 1974, to inspect the NBFC and penalise them for illegal activities. In 1994, RBI introduced the regulatory framework for NBFC on the recommendation of the Shah Working Group. There is a defined regulatory framework for NBFC, which was introduced in 1998.
According to the 1998 framework, it includes-
a. The categorisation of NBFC into- public deposits accepting and non-public deposits accepting. Public Deposits Accepting is engaged in loans, investment, hire purchase and equipment leasing. Non-public deposits accepting are core investment companies that acquire 90 per cent of their total assets but not trading in these securities or shares.b. The deposit meaning was restricted.c. Minimum credit rating and quantum of deposits linked to the credit rating and net owned funds.d. A prohibition from the grant of loan on the security of shares.
The regulatory framework for NBFC was revised in 2014. A sceptical view was framed, and revision was based on new financial products and services introduced by NBFCs. The fundamental changes included-
The objective is to revisit the principles underlying the current regulatory framework and examine the need to develop a scale based approach to regulate and recommend appropriate measures in support of a robust financial system.
The NBFC guidelines for the revised regulatory framework for NBFC include:
The scope includes regulatory restrictions imposed on the banks concerning lending against shares and dividend distribution.
Interpretation of the Norms
In the paper “Revised Framework for NBFC’s- a Scale Based Approach” it has been clarified that NBFCs at the base level has the least interference. The regulatory regime will get stricter as one goes up.
For IPO Financing, their limit has been fixed to 1 Crore. No loans to the companies to buy back their shares. Guidelines on sale stressed asset by NBFC are that of Bank. NBFC with ten or more branches is required to undergo a Core Banking Solution. For auditor requirement the time period is three years.
It can be concluded that the regulatory framework of NBFC has been graded into the hierarchy of a pyramid. This is carried out to ease the process of NBFC Registration for future purposes and to discourage the failure of NBFCs.
Read our article:Revised Regulatory Norms for NBFCs
She is B.Com (H), LL.B LLM, Cs (Module 2) And Certification In Cyber Law From ILI Qualified. She has Been A Legal Teacher In The Previous Organization. My Strength Is My Expertise Knowledge In Civil Laws, Corporate Law And Tax Laws. I Have Been Legal Teacher And Legal Trainer In The Past Organization. Her Knowledge About The Subjects Have Expanded Due To Teaching Number Students From Various Universities All Over India.
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