NBFC Annual Compliance

NBFC Compliance Unveiled: Strategies for Ensuring Integrity and Adherence

Setting up an NBFC is tiring when bundles of formalities roll over to the desk. Handling Compliance is another add-on for such tedious tasks, which sometimes results in poor compliance handling, leading to more problems. If you intend to avail of NBFC Compliance Services, here is what you will get:

• Reputation Protection
• Business Continuity
• Registration & Licensing
• Data Protection
• Capital Adequacy
• KYC & AML

NBFCs in Indian Canvas

Non-Banking Financial Companies or NBFCs have been a topic of talk in the Finance Industry for different reasons like changes in its structure, framework, or generally released circulars by RBI. NBFCs were introduced to direct the finance industry to the areas where banks could not reach. Now, when the purpose has reached beyond the imagination, the risk associated with the same is no longer taking the backseat. Asserting the changing market canvas of NBFCs, the government has also taken initiatives to further strengthen the NBFC mapping in the future prospect by introducing changes in structure, regulatory framework, or Compliance. Before proceeding with the current outline of the NBFC mapping in India, let's take a look at the categorization of NBFCs.

The types of NBFCs have been classified on the basis of two different parameters: NBFCs based on the Liabilities and NBFCs based on Activities. The respective classification is as follows:

NBFCs and their Compliance

DEPOSIT ACCEPTING NBFCS:

• NBS-1 – Applicable to all types of NBFCs having access to public funds and NBS-1 should submitted within 15 days from the end of the Quarter and Return on Financial Indicators by deposit taking NBFCs to capture financial details, viz. components of Assets and Liabilities, Profit and Loss account, Exposure to sensitive sectors etc.
• NBS-2 –This compliance intends to to cess the depositor risk by examining prudential norms applicable to deposit-taking NBFC. NBS-2 must be submitted within 15 days Statement of Capital Funds, Risk Assets, etc., and Return on Prudential Norms by deposit-taking NBFCs to capture compliance with various prudential norms, e.g. Capital Adequacy, Asset Classification, Provisioning, NOF, etc.
• NBS-3 Quarterly – to be submitted within 15 days about Return on Statutory Liquid Assets as per Section 45 IB of the Act.
• NBS-6 Monthly - 7 days Details of Capital Market Exposure. NBFCs-D having public deposit of > ₹ 20 crore Or asset size of> ₹ 100 crore
• Overseas Investment Return - Quarterly within 15 days Return to be submitted by NBFCs having overseas investment.
• Branch info – Branch return needs to be submitted Quarterly with all Branch Details
• CRILC compliance – Return on early Recognition of Stress on large accounts to facilitate early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders. Need to submit Quarterly Reporting to Central Repository of Information on Large Credits.
• ALM (NBFC-D) Half yearly 30 days NBFCs-D having public deposit of > ₹ 20 crore Or asset size of> ₹ 100 crore 9. Return on FDI Half Yearly 30 days To capture compliance with the stipulated minimum capitalization norms.
• NBS-8 Annually – be submitted within 60 days from the end of the financial year; NBS-8 consist of key financial information about the financial health of the NBFC. Return on Financial Indicators to capture company business profile information and financial details, Assets and Liabilities, Profit and Loss account, Exposure to sensitive sectors, Branch Information, etc.
• SAC (Statutory auditors Certificate) - The Auditors of the company are required to submit the Certificate in the desired format within 1 month of signature on the audited balance sheet, and it should not be Not later than 31st December of the following financial year.
• SMA - 2 Return Weekly On Every Friday Reporting of Special Mention Account Status Notes

NON-DEPOSIT ACCEPTING NBFCS:

(For NBFCs with assets size below Rs. 100 Crore):

• Branch Info Return - Quarterly 15 days Branch Details.
• NBFC has an asset size of Rs. 50 cr and above.
• Overseas Investment Return Quarterly 15 days Return to be submitted by NBFCs having overseas investment.
• Return on FDI Half Yearly 30 days To capture compliance with the stipulated minimum capitalization norms.
• NBS-9 Annually 60 days Annual Return
• SAC Annually 1 month Statutory Auditor Certificate within 1 month from the date of finalization of Balance Sheet. Not later than 31st December.

(For NBFCs with assets size above Rs. 100 Crore-500 Crore)

• Return on Important Financial Parameters Monthly 7 days Sources and Application of Funds, Profit and Loss Account, Asset Classification etc.
• ALM-1 Quarterly 15 days Statement of Short-Term Dynamic Liquidity
• Branch Info Return Quarterly 15 days Branch Details
• Overseas Investment Return Quarterly 15 days Return to be submitted by NBFCs having overseas investment
• Return on FDI Half Yearly 30 days to capture compliance with the stipulated minimum capitalization norms
• ALM-2 Half Yearly 30 days Statement of Structural Liquidity
• ALM-3 Half Yearly 30 days Interest Rate Sensitivity
• ALM Yearly Annually 15 days Disclosure in Balance Sheet. CRAR, Exp to Real Estate,
• NBS-8 Annually 60 days - Return on Financial Indicators to capture profile information and financial details, viz. components of Assets and Liabilities, Profit and Loss account, Exposure to sensitive sectors, Branch Information, etc. NBS-8 has to be filled Within 60 days from the end of the year, i.e., 30th May
• SAC Annually 1-month Statutory Auditor Certificate within 1 month from the date of finalization of the Balance Sheet. Not later than 31st December.

SYSTEMATICALLY IMPORTANT (NBFC-ND-SI):

• Return on Important Financial Parameters Monthly 7 days Sources and Application of Funds, Profit and Loss Account, Asset Classification etc.
• ALM-1 Quarterly 15 days Statement of Short-Term Dynamic Liquidity
• Branch Info Return Quarterly 15 days Branch Details
• NBS-7 Quarterly 15 days Quarterly Return of Capital Funds, Risk-Asset Ratio (Supervisory Return)
• Overseas Investment Return Quarterly 15 days Return to be submitted by NBFCs having overseas investment.
• CRILC Quarterly 21 days Reporting to Central Repository of Information on Large Credits
• Return on FDI Half Yearly 30 days To capture compliance with the stipulated minimum capitalization norms.
• ALM-2 Half Yearly 30 days Statement of Structural Liquidity
• ALM-3 Half Yearly 30 days Interest Rate Sensitivity
• ALM Yearly Annually 15 days Disclosure in Balance Sheet. CRAR, Exp to Real Estate,
• NBS-8 Annually 60 days Annual Return
• SAC Annually 1-month Statutory Auditor Certificate within 1 month from the date of finalization of the Balance Sheet. Not later than 31st December.
• SMA-2 Return Weekly On Every Friday Reporting of Special Mention Account status

Empowering Financial Access with Digital Lending

In today's fast-paced world, digital lending provides financial convenience, speed, and accessibility to borrowers. In this presentation, we are exploring the benefits, challenges, and the future of digital lending

Download PDF

NBFCs Based on Activities

1. Infrastructure Finance Company (IFC):

   An IFC is a form of NBFC which focuses on providing financial assistance to infrastructure businesses. In order to be considered as an NBFC, an IFC shall fulfil certain requirements such as usage of 75% of its assets in the Infrastructure Loan, gross owned funds of a minimum of INR 300 billion, a credit score of "A” [equivalent of FITCH, CRISIL, ICRA, CARE, or other], and CRAR of 15%.

2. Investment and Credit Company (ICC):

   NBFC-ICC was introduced by RBI in 2019 by collaborating three different NBFCs [Asset Financing NBFC, Investment companies and loan companies] into one. NBFC-ICC is a company with its principal business in Assets Finance, which provides finance to any activity other than its own in various manner, such as acquisition of property or assets, loan lending, etc.

3. Systemically Important Core Investment Company (CIC):

   Those NBFCs with asset size of INR 100 Crore or above carrying on the business of purchase of shares and securities. Such CICs are required to satisfy certain conditions, such as accepting public funds and holding a minimum of 90% of its gross assets (as an investment) in equity shares, preference shares, bonds, debentures, debt or loans in group companies. Such investments should be convertible into equity shares before the completion of 10 years (from the date of issue). The trade should be done by block sale for either dilution or disinvestment rather than trade of investments in shares. It should not carry on certain prohibited financial activity (activities referred to in Section 45I(c) and 45I(f) of the RBI Act) except investment in bank deposits, government securities, and money market instruments.

4. Non-Operative Financial Holding Company (NOFHC):

   Non-Operative Financial Holding Company (NOFHC) is a wholly owned financial institution which allows promoters to establish a new bank group will be permitted to set up a new bank. It will hold banks and all the financial services companies that RBI or other financial regulators regulate as per the applicable regulatory framework.

5. Mortgage Guarantee Companies:

   A mortgage guarantee is a company which guarantees a mortgagee for the asset mortgaged by him or her. By doing so, it exposes itself to a potential loss in case of a default on such a loan guaranteed by it.

6. NBFC-Factors:

7. Microfinance Companies (MFIs)

8. Infrastructure Debt Fund Non-Banking Financial Company (IDF-NBFC)

NBFCs in layers

Every NBFC registered under the Companies Act is classified by the RBI into different categories by analyzing different factors such as Comprehensive Risk Perception, Operations Size, and other activities. To make it formulative, RBI introduced Scale Based Regulations, which came into force on 1^st October 2022. RBI introduced these Regulations on 22 October 2021 to restructure the set of regulations for NBFCs by keeping certain provisions inert, few revised and mandates introduced which would be subject to varied regulatory frameworks, further leading to the categorization of four types of NBFCs.

The NBFCs registered under the Companies Act are classified into the following four types:

Base Layer

RBI has introduced the base layer as a new category of NBFC, which will be equivalent to the existing non-deposit-taking, non-systemically important NBFCs (NBFC-NDs). In India, most NBFCs fall in the Base layer, and RBI believes that base-layer NBFCs should face lesser compliance. If a deposit NBFC with an asset size less than INR 1,000 crore will fall in the base layer, and above 1000 cores, the asset size will fall in the middle layer and be part of NBFC-BL.

It will specifically include –

• NBFC-P2P (NBFC-Peer to Peer lending platform)
• NBFC-AA (NBFC-Account Aggregator)
• NOFHC (Non-Operative Financial Holding Company) and
• NBFCs without public funds and customer Interface

While a higher level of compliance requirement will not be applicable to such entities, there will be an increase in the transparency requirements through additional disclosures and improved governance standards.

Middle Layer

NBFCs falling into one of the following categories of the company are regulated under the Middle Layer Regulatory Framework

• All deposit-taking NBFCs (NBFC-Ds) [irrespective of the asset size]
• Non-deposit-taking NBFCs [asset size of ₹1000 crore and above]
• Standalone Primary Dealers (SPDs)
• Infrastructure Debt Fund– NBFCs (IDF-NBFCs)
• Housing Finance Companies (HFCs)
• Core Investment Companies (CICs)
• Infrastructure Finance Companies (NBFC-IFCs)

NBFC-Ds, CICs, NBFC-IFCs, HFCs, or Government-owned NBFCs may be included in the Middle Layer or the Upper Layer as per case. However, these will never be subject to the Base Layer. Whereas SPDs and IDF-NBFCs will always be in the Middle Layer.

Upper Layer

The RBI has created a new category of NBFCs called the upper layer. This category will include a small number of systemically important NBFCs, which the RBI will identify based on certain quantitative and qualitative criteria. These criteria will be reviewed periodically. NBFCs meeting the criteria will move from the middle to the upper layer. The top 10 NBFCs by asset size will also be included in the upper layer, regardless of any other factors. NBFCs in the upper layer will be subject to higher prudential regulations and intensive supervision in proportion to their systemic significance.

In other words, the RBI is creating a new category of NBFCs that will be subject to stricter regulations and supervision. This is because these NBFCs are considered systemically important, meaning that their failure could significantly impact the financial system.

The RBI will identify which NBFCs belong in the upper layer based on certain criteria, such as their asset size, market share, and interconnectedness with other financial institutions. The RBI will also review these criteria periodically to ensure that the upper layer includes the most systemically important NBFCs.

NBFCs in the upper layer will be subject to higher prudential regulations, such as higher capital requirements and liquidity ratios. They will also be subject to intensive supervision by the RBI. This is to ensure that these NBFCs are well-managed and financially sound and reduce the risk of failure.

Top Layer

Any NBFC whose potential systemic risk is recognized by the RBI as substantially increasing is shifted to the Top layer from the Upper Layer. As per the current practice, the Top Layer remains empty, with no NBFCs listed under this head.

Compliance in different Layers

RBI Compliance for Base Layer NBFC

1. Disclosure requirement

   – the scope of NBFC compliance has been expanded to include related party transactions and loans to directors/senior officers. NBFC must set up approved policies in case loans to the related parties

2. ICAAP Requirement

   - Base layer NBFC has been exempted from ICAAP requirements.

3. Concentration of credit/investment

   - Current norms are applicable- no change in limits

4. SSE Compliance

   - RBI compliance for Sensitive Sector Exposure (SSE) is not applicable on Base-layer base-layer NBFC

5. Regulatory restrictions on loans

   Not applicable on Base Lawyer NBFC

6. KMP Restriction is not applicable

   – This Means the director in the base layer NBFC can hold a similar position in the other NBFC.
7. Independent directors can hold any no of positions as permitted by the Companies Act 2013.

Enhanced capital requirement for Base layer NBFC – Every NBFC operating with less than 10 crores in the base layer will be required to update their capital to Rs. 10 crores by 2027. The below deadline has been set for the NBFC under the Base layer.

RBI Compliance for Middle (ML- NBFC) and upper Layer (UL-NBFC)

1. ICAAP Compliance-

   NBFCs in the middle and upper layer are required to make a thorough internal assessment of the need for capital commensurate with the risks in their business, on similar lines as ICAAP for commercial banks

2. Concentration of credit/investment

   - The separate lending and investment exposure limits have now been merged into a single exposure limit. The limit will now be computed as a percentage of Tier 1 capital (instead of being computed as a percentage of the owned fund)

3. Sensitive Sector Exposure (SSE)

   - BoD approved internal limits to be fixed for SSE, separately for capital market and commercial real estate exposures. There is no change in norms for HFCs, which will continue to follow current regulations

4. KMP Restrictions

   - Restrictions on KMPs from holding any office (including directorships) in any other NBFC-ML or NBFC-UL

5. Independent director (ID)

   – Independent directors are restricted from being on the BoD of more than three NBFCs at the same time

6. Extensive disclosure in financial statements

   – With effect from 31 March 2023, NBFCs are required to make the following additional disclosures in their annual financial statements:
   • Corporate governance report
   • Disclosure of modified opinion
   • Exceptional income or expenses
   • Breaches in terms of covenants or defaults
   • Divergence in asset classification and provisioning

7. Requirement of chief compliance officer

   - NBFCs in the middle and upper layer are required to have an independent compliance function and appoint a Chief Compliance Officer (CCO)

8. Compensation guidelines

   - NBFCs to put in place a BoD-approved compensation policy for KMP and senior management, which includes:
   • Constitution of a Remuneration Committee
   • Principles for fixed/variable pay structures
   • Malus/clawback provisions

9. Additional governance matters

   - Additional governance matters to be complied with include:
   • Delineate the role of various committees
   • Formulate a whistle-blower mechanism
   • Ensure good corporate governance practices in subsidiaries

10. Core Financial solutions

    - Mandatory for NBFCs with 10 or more branches

RBI mandatory compliance Applicable for upper Layer

1. Revisions in capital guidelines

   –
   • CET 1 of at least nine per cent of risk-weighted assets
   • Leverage requirements will be applicable. The RBI will prescribe a suitable ceiling for leverage
   • Differential standard asset provisioning applicable, similar to provisions applicable to banks

2. Internal exposure limits

   - BoD-approved internal exposure limits are to be set for important sectors to which credit is extended; this is in addition to SSE limits, which are applicable to NBFCs in both the middle and upper layer

3. Qualification of Directors

   – Composition of BoD to include a mix of educational qualifications and experience

4. Listing and disclosures

   - NBFCs in the upper layer are to be listed within three years of identification as NBFC-UL. Unlisted NBFC-ULs to draw up a board-approved road map for compliance with disclosure requirements of listed companies.

5. Removal of independent directors -

   NBFCs in the upper layer are required to report to RBI in case any ID is removed/resigns before the completion of his/her normal tenure. Earlier, NBFCs were not required to report removal/resignation by an ID.

One-time mandatory registration for all types of NBFC.

1. Registration with CIC

   : Every company that has an NBFC license from RBI must registered with all four Credit information companies (Equifax, Experian, Crif High Mark and CIBIL) - Entity registration is Due before the disbursement of 1^st loan or before the commencement of financing Business, and further monthly reporting about the entire loan book has to be submitted by the 7the day of the following month

2. CKYC Registration

   : Every company that has an NBFC license from RBI must apply for new Entity registration and new borrowers' CKYC creation within 3 days from loan disbursement

3. FIU-Ind Registration

   : Every company that has an NBFC license from RBI must apply for a new entity and event based on cash and a Suspicious Transaction of 10 Lakhs.

4. NESL Registration

   : first-timenew entity registration and to upload and Provide information to the IBBI within 7 days from charge creation

5. CERSAI

   - registration of transactions of securitization, asset reconstruction of financial assets and creation of security interest over property, as contemplated under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)

Mandatory policies to be adopted by the NBFC along with implementation of all RBI Master direction

Important Prudential Norms Applicable on NBFC

1. Leverage Ratio:

   NBFCs (except NBFC-IFCs and NBFC-MFIs) are required to maintain a leverage ratio of not exceeding seven at any course of action.

2. Accounting of investments:

   The Board of Directors of NBFC are required to frame the company's investment policy and implement it. For instance, the criteria for categorizing investments into current and long-term investments.

3. Policy for demand/call loans:

   The Board of Directors of an applicable NBFC that wishes to demand/call loans should frame a policy that the company would implement.

4. Provisioning for NPA by NBFC –

   the Assets of the NBFC are required to be classified into Standard and substandard assets, Doubtful and total loss: the prudential norms for recognizing the Non-performing assets (NPA). Each applicable NBFC should make provision for the standard assets at 0.25% of the standard outstanding loan book and further provision based on NPA classification; all types of NBFC are required to follow the prudential norms applicable to NBFC for classification of the assets.

5. Multiple NBFCs:

   All applicable NBFCs would be aggregated jointly to check the limit of 1000 Crore rupees of asset size.

6. Disclosure in the Balance Sheet:

   Every NBFC will have separate disclosure provisions for doubtful/bad debts & depreciation in investments.

Change in Regulation in recognizing NPA (Non-performing assets)

The RBI introduced the NPA norms relying on the Narsimham Committee recommendations & prudential norms for Income Recognition, Asset Classification and provisioning for the advance portfolio of the banks with the intention for proper disclosure of profit & loss and reflect the bank's financial health. As per the regulations issued by RBI, the provisioning of assets is critical for all entities in the financial services sector. Currently, the SI-NBFC Master Directions1, NSI-NBFC Master Directions and HFC Master Directions (collectively termed as Master Directions) provide norms for asset classification and provisioning for NBFCs. As per the Master Directions, every NBFC shall, after considering the degree of well-defined credit weaknesses and extent of dependence on collateral security for realization, classify its lease/hire purchase assets, loans and advances and any other forms of credit into the following classes, namely:

• Standard assets;
• Sub-standard assets;
• Doubtful assets; and
• Loss assets.

Provisioning is required for each of these assets at the rates prescribed by RBI. Additionally, NBFCs must disclose provisions made per the RBI regulations in their financial statements.

NPA classification

Currently, the NBFCs-ND with an asset size of less than INR500 crore (i.e., non-systemically important, non-deposit-taking NBFCs) classify assets with an overdue period of more than 180 days as NPA (NPA norm). All other NBFCs have an NPA norm

of 90 days. The RBI has now harmonized the NPA norms for all NBFCs to 90 days. This amendment will impact the NBFCs in the base layer, which includes the NBFC- ND (i.e., the non-systemically important, non-deposit-taking NBFCs). Accordingly, a glide path has been provided to NBFCs in the base layer to adhere to the 90-day NPA norm, as given below

• By 31^st March 2024, NPA shall be recognized at 150 Days overdue
• By 31^st March 2025, NPA shall be recognized at 120 Days overdue
• By 31^st March 2026, NPA shall be recognized as 90 Days overdue

NPA provisioning norms for NBFC

1. For Standard assets

   , NPA Provisioning - 0.25% for NBFC assets size less than 500 crores and 0.4% of the Outstanding Principal Amount in another case.

2. For Sub-standard assets

   - Beyond the prescribed time period as per RBI Master direction. NBFC Companies are required to assess Expected credit losses (ECL) and form a policy regarding the impartment of assets as per Ind-AS-109, which means that a loss event doesn't need to occur before an impairment loss is recognized. Categorizing assets as sub-standard or doubtful assets or total assets is only an estimate based on the business history or industry trend in the case of NBFC, and the Board of Directors of the NBFC will be required to form a policy in this regard. ECLs represent a calculated probability-weighted projection of credit losses. In simpler terms, they reflect the current value of anticipated cash deficits throughout the anticipated lifespan of a financial instrument. These deficits arise from the variance between the cash inflows owed to an entity as specified in the contract and the cash inflows the entity anticipates receiving from the recovery proceedings. If the loan is NPA up to 12 months, the same is called Sub Standard Assets Point to be noted that – a provision of 10% Provision can be made on the outstanding amount, and any loan Outstanding is overdue by 12 months.
   • Secured Exposure - 15 %
   • Unsecured Exposure – 25%
   • Unsecured exposure in respect of Infrastructure loan - 20%

3. Doubtful assets NPA –

   any loan amount overdue between 1 year to 3 years shall be considered doubtful assets. Unsecured portion 100 per cent provision, and for the Secured portion, 20% to 50% provision on the basis of the period for which the asset is considered doubtful.

   • Overdue up to one year

     - 100% on unsecured portion & 25% on realizable value of Assets.

   • Overdue 1 to 3 years -

     100% on unsecured portion & 40% on NPA – Asset Classification & Income Recognition Asset Classification

   • Over 3 years –

     100% write off

4. Loss Assets NPA

   – as When after 3 years or before in case of unsecured loan and after 3 years in case of Secured loan. The entire asset is to be written off or 100 per cent provision on the outstanding amount. 

RBI's important event-based Compliance Requirement

1. Management Change Compliance

   - Any change in the management of the NBFC that would lead to a shift of over 30 per cent of the directors, excluding independent directors.

2. Shareholding Change Compliance

   - Any change in the ownership of an NBFC, progressive increases over time that would result in the acquisition or transfer of 26 per cent or more of the paid-up equity capital of the NBFC in such case prior approval from RBI is mandatorily required.

3. Shifting of Registered office

   – NOC from RBI shall be obtained, and Then NBFC will be required to complete the necessary formalities as laid down by the Companies Act.

4. Change in Name and Change in Object Clause

   – Prior Approval from regional RBI is required.