RBI tightens norms for NBFCs

The Reserve Bank of India has tightened the regulatory framework for non-banking finance companies (NBFCs). Like banks, they will be subject to 90-day overdue norms for identification of bad loans, will be required to make higher provisioning for non-standard assets and have to put in place ‘fit and proper criteria’ for directors.

The revised regulatory framework for NBFCs is aimed at addressing regulatory gaps and arbitrage arising from differential regulations, both within the non-banking finance sector as well as in relation to other financial institutions.

With the unveiling of the framework, the process of issuing Certificate of Registration (CoR), which was kept in abeyance for the last six months or so for conducting NBFC business, will start once again.

Given the need for strengthening the financial sector and technology adoption, and in view of the increasing complexities of services offered by NBFCs, the RBI said it will be mandatory for all NBFCs to attain a minimum net owned fund (NOF) of ₹2 crore by the end of March 2017.

The limit for acceptance of deposits across the NBFC sector has been harmonised by reducing the same for rated asset finance companies from four times to 1.5 times of NOF, with immediate effect.

Hitherto, an unrated AFC having NOF of ₹25 lakh, complying with all the prudential norms and maintaining capital adequacy ratio of not less than 15 per cent, was allowed to accept or renew public deposits not exceeding one-and-a-half times its NOF or up to ₹10 crore, whichever is lower.

Further, AFCs which are rated and complying with all the prudential regulations were allowed to accept deposits up to four times their NOF.

The RBI pointed out that systemic risks posed by NBFCs functioning exclusively out of their own funds and NBFCs accessing public funds cannot be equated and hence cannot be subjected to the same level of regulation.

Hence, as a principle, enhanced prudential regulations will be made applicable to NBFCs wherever public funds (includes funds raised directly or indirectly through public deposits, commercial papers, debentures, inter-corporate deposits and bank finance) are accepted and conduct of business regulations will be made applicable wherever customer interface is involved.

In view of the overall increase in the growth of the NBFC sector, the threshold for defining systemic significance for NBFCs-Non-Deposit taking-Systemically Important (NBFC-ND-SI) has been revised to ₹500 crore from ₹100 crore.

With this revision in the threshold for systemic significance, NBFCs-ND will be categorised into two broad categories — NBFCs-ND (those with assets of less than ₹500 crore) and NBFCs-ND-SI (those with assets of ₹500 crore and above).

Consequent to the redefining of ‘systemic significance’ NBFCs-ND with asset size of less than ₹500 crore are exempted from the requirement of maintaining CRAR and complying with Credit Concentration Norms.

All NBFCs-ND which have an asset size of ₹500 crore and above, and all NBFCs-Deposit taking, will have to maintain minimum Tier 1 capital of 10 per cent in a phased manner by March-end 2017.

However, the minimum Tier 1 capital requirement for NBFCs primarily engaged in lending against gold jewellery remains unchanged at 12 per cent for the present.

In the interest of harmonisation, the asset classification norms for NBFCs-ND-SI and NBFCs-D are being brought in line with that of banks, which are subject to ‘90 days’ overdue norms for identification of non-performing assets (NPAs), in a phased manner.

At present, an asset is classified as an NPA by an NBFC when it has remained overdue for a period of six months or more for loans; and overdue for 12 months or more in case of lease rental and hire purchase instalments, as compared to 90 days for banks.

The provision for standard assets for NBFCs-ND-SI and for all NBFCs-D, is being increased to 0.40 per cent in a phased manner.