Non-Banking Financial

Companies: A Quick

Guide

Niddhi Parmar

M/s Vinod Kothari & Company 1006-1009, Krishna 224 AJC Bose Road Kolkata – 700017 Phone 033-22811276/ 22813742/7715

E-mail – finserv@vinodkothari.com

601-C, Neelkanth, 98 Marine Drive, Mumbai 400002 Phone 022-22817427 E-mail: bombay@vinodkothari.com

www.vinodkothari.com Email: parmar@vinodkothari.com

Copyright

• The presentation is a property of Vinod Kothari & Company. No part of it can be copied, reproduced or distributed in any manner, without explicit prior permission.

• In case of linking, please do give credit and full link

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About Us • Vinod Kothari and

Company, ▫ Based in Kolkata, Mumbai

• We are a team of consultants, advisors & qualified professionals having recently completed 25 years of practice.

Our Organization’s Credo:

Focus on capabilities; opportunities follow

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What is a NBFC?

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• A Non-Banking Financial Company (NBFC) is a: ▫ Company registered under the Act, 1956 or Act, 2013; and

▫ Carrying business of financial institution

• Sec 45I (c) of the RBI Act defines “financial institution”.

1. Financing - by way of giving loans, advances or otherwise

2. Acquisition of shares, stocks, bonds, debentures or securities

3. Hire purchase

4. Insurance Business

5. Chits, kuries, etc business

6. Money circulation schemes

1. Agricultural operations

2. Industrial activity

3. Purchase or sale of any goods (other than securities) or

4. Providing any services and sale/purchase/construction of immovable property

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Test for determining a NBFC?

• How to identify whether the company is a NBFC or not? ▫ RBI vide its Press Release no. 1998-99/1269 dated April 8, 1999, laid

down the criteria for determining the principality of business [popularly known as 50-50 principal business criteria] both the assets and the income pattern as evidenced from the last

audited balance sheet ▫ financial assets of a company

more than 50 per cent of its total assets (netted off by intangible assets) ▫ income from financial assets

more than 50 per cent of the gross income,

• The criteria of income/assets are cumulative, that is, both the tests are required to be satisfied simultaneously as the determinant factor for principal business of a company.

• Based on the above press release, the RBI has been insisting on ▫ obtaining an annual certificate from the auditor of an NBFC that the

company continues to carry on the business of an NBFC Circular No. DNBS (PD) C.C. No. 81/03.05.002/2006-07 dated October

18, 2006.

Difference between Banks &

NBFCs

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• NBFCs activities are akin to that of Banks. However, below mentioned are few differences: ▫ NBFC cannot accept demand deposits;

▫ NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;

▫ deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

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Requirement of registration and

NOF • Section 45-IA of the RBI Act states that – ▫ no non-banking financial company shall commence or carry on

the business of a non-banking financial institution without – obtaining a certificate of registration; and

having the net owned fund Rs. 2 crores (Rs 25 lacs – April, 1999) However, as per revised regulatory framework if a NBFC is having

NOF of less than Rs. 2 crores then such companies need to increase the NOF in the following manner – ▫ Rs. 100 lakhs before April 1, 2016; and

▫ Rs. 200 lakhs before April 1, 2017

▫ Certain class of NBFCs regulated by other regulators are exempted from the requirement of registration with RBI – Merchant Banking/ stock broking companies– SEBI;

Insurance Companies – IRDA;

Nidhi Companies – Act, 1956 or Act, 2013;

Housing Finance Companies – NHB; etc..

Types of NBFCs

Types of NBFCs (1/2)

NBFCs

Liability

Deposit accepting

Non-Deposit

accepting

Size

Systemically important

NBFCs

Non-Systemically

important NBFCs

Activity

Next Slide

Types of NBFCs (2/2)

Kind of Activities

Asset Finance Company (AFC)

Investment Company (IC)

Loan Company (LC)

Infrastructure Finance Company(IFC)

SI-Core Investment Company (CIC-ND-SI)

Infrastructure Debt Fund (IDF)

Micro Finance Institution (NBFC-MFI)

Factors (NBFC-Factors)

Mortgage Guarantee Companies

Non-Operative Financial Holding Company (NOFHC)

How to determine the type of

NBFCs (1/5) • Asset Finance Company: ▫ financing of physical assets supporting productive/

economic activity. such as automobiles, tractors, generator sets, earth moving, etc.

Eg. Magma Fincorp Limited, Srei Equipment Finance Limited

• Loan Company: ▫ Providing of finances, whether by making loans or advances

or otherwise for any other activities other than its own but does not incl. AFC

Eg. Fullerton India Credit Company Limited, India Infoline Finance Limited

• Investment Company: ▫ carrying on as its principal business of acquisition of

securities Eg. Tata Investment Corporation Limited

• Infrastructure Finance Company: ▫ which deploys at least 75 per cent of its total assets in

infrastructure loans, has a minimum Net Owned Funds of Rs. 300 crore, has a minimum credit rating of „A „or equivalent and a CRAR of 15%.

Eg. L&T Infrastructure Finance Company Limited, IDFC Limited

• Infrastructure Debt Fund: ▫ IDF facilitate the flow of long term debt into infrastructure

projects; ▫ Can raise resources through issue of Rupee or Dollar

denominated bonds of minimum 5 year maturity ▫ Only IFC can sponsor IDF-NBFCs

IDF can be set up either as a Trust or as a Company – If it is a trust then it will be a Mutual Fund (regulated by SEBI) and if it is a Company then it will be a Company (regulated by RBI) As on June 30, 2015 only 3 companies are registered with RBI i.e.

India Infradebt Limited, L&T Infra Debt Fund Limited, IDFC Infra Debt Fund Limited

How to determine the type of

NBFCs (2/5)

• Systemically Important Core Investment Company: ▫ acquisition of shares and securities

holds not less than 90% of its Total Assets investment in equity shares, preference shares, debt or loans in group

companies;

investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its Total Assets;

does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;

does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies.

asset size is Rs 100 crore or above and accepts public funds

Eg. Tata Capital Limited

How to determine the type of

NBFCs (3/5)

• Micro Finance Institution: ▫ ND-NBFC having not less than 85% of its assets in the nature of “qualifying assets”

▫ Qualifying Assets means a loan which satisfy the following criteria: loan disbursed by an NBFC-MFI to a borrower with a rural household annual

income not exceeding Rs. 1,00,000 or urban and semi-urban household income not exceeding Rs. 1,60,000;

loan amount does not exceed Rs. 60,000 in the first cycle and Rs. 1,00,000 in subsequent cycles;

total indebtedness of the borrower does not exceed Rs. 1,00,000; tenure of the loan not to be less than 24 months for loan amount in excess of Rs.

15,000 with prepayment without penalty; loan to be extended without collateral; aggregate amount of loans, given for income generation, is not less than 50 per cent

of the total loans given by the MFIs; loan is repayable on weekly, fortnightly or monthly instalments at the choice of the

borrower ▫ Having a minimum NOF of Rs. 5 crores (except NBFCs registered in North

Eastern Region) Eg. SKS Microfinance Limited, Asmitha Microfin Limited

▫ NBFCs does not qualifying as MFI shall not extend loans to MF Sector in aggregate exceeding 10% of the Total Assets.

How to determine the type of

NBFCs (4/5)

• Factors: ▫ Business of factoring

▫ financial assets - at least 50 percent of its total assets and its income - should not be less than 50 percent of its gross income.

SBI Global Factors Ltd., India Factoring & Finance Solutions Pvt Ltd

• Mortgage Guarantee Company: ▫ 90% of the business turnover is mortgage guarantee business or

at least 90% of the gross income is from mortgage guarantee business and net owned fund is Rs.100 crore.

India Mortgage Guarantee Corporation

• Non-Operative Financial Holding Company: ▫ promoter / promoter groups will be permitted to set up a new

bank.

▫ a wholly-owned NOFHC which will hold the bank as well as all other financial services companies

How to determine the type of

NBFCs (5/5)

Some Important Concepts

Asset Classification

• Standard Assets: ▫ No default in repayment of principal or interest

• Sub-standard Assets: ▫ Asset been classified as Non-performing asset for a period of not exceeding 18

months Non-performing asset means an asset, term loan, demand/ call loan, bill – which

remained overdue for a period of 6 months or more; lease rental and hire purchase instalment, which has become overdue for a period

of 12 months or more

• Doubtful Assets: ▫ Asset remaining sub-standard for a period exceeding 18 months or such shorter

period • Loss Assets:

▫ Identified by the Company/ external or internal auditor/ RBI • For sub-standard assets and doubtful assets - period „not exceeding 18 months‟ stipulated in this sub-clause shall be „not exceeding 16 months‟ for the financial year ending March 31, 2016; „not exceeding 14 months‟ for the financial year ending March 31, 2017 and „not exceeding 12 months‟ for the financial year ending March 31, 2018 and thereafter”

Capital Risk Adequacy Ratio

(CRAR)

• NBFC-ND-SI, NBFC-D, NBFC-MFI, NBFC-IFC shall maintain a minimum CRAR of 15 percent.

• CRAR = Tier I + Tier II Capital Aggregate Risk Weighted Assets • The total Tier I capital, at any point of time shall not be

less than 8.5 percent by March 31, 2016 and 10 percent by March 31, 2017.

• The total Tier II Capital for NBFC-MFIs, at any point of time, shall not exceed 100 percent of Tier I Capital.

• NBFCs primarily engaged in lending against gold jewellery (such loans comprising 50 percent or more of their financial assets) shall maintain a minimum Tier l capital of 12 percent.

Tier I Capital

• “Tier I Capital” means owned fund as reduced by investment in shares of other NBFC and in shares, debentures, bonds, outstanding loans and advances including hire purchase and lease finance made to and deposits with subsidiaries and companies in the same group exceeding, in aggregate, ten per cent of the owned fund; and perpetual debt instruments issued by a non-deposit taking non-banking financial company in each year to the extent it does not exceed 15% of the aggregate Tier I Capital of such company as on March 31 of the previous accounting year; ▫ “owned fund” means paid up equity capital, preference shares

which are compulsorily convertible into equity, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset, as reduced by accumulated loss balance, book value of intangible assets and deferred revenue expenditure, if any.

Tier II Capital

• “Tier II capital” includes the following: ▫ preference shares other than those which are compulsorily

convertible into equity; ▫ revaluation reserves at discounted rate of fifty five per cent; ▫ general provisions (including that for standard assets) and

loss reserves to the extent these are not attributable to actual diminution in value or identifiable potential loss in any specific asset and are available to meet unexpected losses, to the extent of one and one fourth per cent of risk weighted assets;

▫ hybrid debt capital instruments; and ▫ subordinated debt ▫ perpetual debt instruments issued by a non-deposit taking

non-banking financial company which is in excess of what qualifies for Tier I Capital, to the extent the aggregate does not exceed Tier I capital.

Risk Weighted Assets

• Degrees of credit risk expressed as percentage weightages have been assigned to balance sheet assets in the prudential norms.

▫ Eg. Cash and bank balance, FDs – 0

▫ Inter corporate loans/ deposits – 100

▫ Loans to Staff – 0

▫ Fixed Assets (net of depreciation) - 100

• Risk Weighted Assets = the value of each asset/ item X the relevant risk weights

• For off-balance sheet items - the notional amount of the transaction is converted into a credit equivalent amount

▫ credit equivalent amount X risk weight applicable.

Leverage Ratio

• Leverage ratio shall not be more than at 7 times at any point of time, w.e.f 27th March, 2015

• Leverage Ratio = Total Outside Liabilities

Owned Funds

• “Outside Liabilities” means total liabilities as appearing on the

liabilities side of the balance sheet excluding 'paid up capital' and 'reserves and surplus', instruments compulsorily convertible into equity shares within a period not exceeding 5 years from the date of issue but including all forms of debt and obligations having the characteristics of debt, whether created by issue of hybrid instruments or otherwise, and value of guarantees issued, whether appearing on the balance sheet or not.

Applicable Regulations

Regulations applicable to NBFCs

(1/2) Regulations Applicability

Reserve Bank of India Act, 1934 All NBFCs

Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007

Deposit taking NBFCs

Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998

All NBFCs

Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015

NBFC- ND-SI

Non-Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015

NBFC-ND-NSI

Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977 All NBFCs

Non-Banking Financial Companies – Corporate Governance (Reserve Bank) Directions, 2015

All NBFCs

Miscellaneous Instructions to all Non-Banking Financial Companies All NBFCs

Miscellaneous Instructions to NBFC- ND-SI All NBFCs

Regulations Applicability

Non-Banking Financial Companies Auditor‟s Report (Reserve Bank) Directions, 2008

All NBFCs

Frauds –Future approach towards monitoring of frauds in NBFCs NBFC-D; NBFC-ND-SI

Fair Practice Code All NBFCs

Know Your Customer' (KYC) Guidelines – Anti Money Laundering Standards (AML) - 'Prevention of Money Laundering Act, 2002 - Obligations of NBFCs in terms of Rules notified thereunder

All NBFCs

Returns to be submitted by NBFCs All NBFCs

Raising Money through Private Placement by NBFCs – Non-Convertible Debentures ets.

All NBFCs

Rounding off transactions to the Nearest Rupee by NBFCs All NBFCs

Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalizing Distressed Assets in the Economy

All NBFCs

Requirement for Obtaining Prior Approval of RBI in Cases of Acquisition / Transfer of Control of NBFCs

All NBFCs

Regulations applicable to NBFCs

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