non-banking financial companies (nbfcs) final
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Non-Banking Financial Companies
(NBFCs)
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What are NBFCs?
NBFCs are financial intermediaries engaged primarily in the
business of accepting deposits and delivering credit
Clause (b) of !ection "#-$ of Chapter $$$B of %B$ &ct' *"
defines an NBFC as+
(i) a financial institution' ,hich is a company
(ii) a non-banking financial institution' ,hich is a companyand ,hich has as its principal business the receiving of
deposits under any scheme or arrangement or in any other
manner or lending in any manner
(iii) such other non-banking institutions or class of such
institutions' as %B$ may ,ith previous approval of central
govt may specify
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What are NBFCs?
& Non-Banking Financial Company (NBFC) is a company
registered under Companies &ct' # engaged in the business
of loans and advances' ac.uisition of
shares/stocks/bonds/debentures/securities issued by 0ovt or
local authority or other marketable securities of a like nature'
leasing' hire-purchase' insurance business' chit business butdoes not include any institution ,hose principal business is
that of agriculture activity' industrial activity' purchase or sale
of any goods (other than securities) or providing any services
and sale/purchase/construction of immovable property
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1ypes of NBFCs
1hey are classified as+
&sset Finance Company + $t means a company ,hich is a
financial institution carrying on as its principal business the
financing of physical assets supporting productions/economic
activities such as automobiles' tractors' lathe machines'
generator sets etc2 $nvestment Company+ & company that is a financial institution
carrying on as its principal business' the ac.uisition of
securities
* 3oan Company+ & company that is a financial institution,hose principal business is providing finance' ,hether by
making loans or advances or other,ise for any activity other
than its o,n but does not include an asset finance company
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" $nfrastructure Finance Company ($FC)+ $FC is a non-banking
finance company
a) ,hich deploys at least 4#5 of its total assets in infrastructureloans'
b) has a minimum Net 6,ned Funds of %s *77 crore'
c) has a minimum credit rating of 8& 8or e.uivalent
d) and a C%&% of #5
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# !ystemically $mportant Core $nvestment Company (C$C-N9-
!$)+$t is an NBFC carrying on business of ac.uisition of shares
: securities ,hich satisfies the follo,ing conditions+-
(a) it holds not less than 75 of its 1otal &ssets in the form of
investment in e.uity shares' preference shares' debt or loans in
group companies;
(b) its investments in e.uity shares (including instruments
compulsorily convertible into e.uity shares ,ithin a period not
e
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(d) it does not carry on any other financial activity referred to in
!ection "#$(c) and "#$(f) of the %B$ act' *" e
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$nfrastructure 9ebt Fund+ $tis a company registered as NBFC to
facilitate flo, of long term debt into infrastructure pro>ects $t
raises resources through issue of %upee or 9ollar denominated
bonds of minimum # year maturity 6nly $nfrastructure FinanceCompanies ($FC) can sponsor $9F-NBFCs
4 Non-Banking Financial Company - icro Finance $nstitution
(NBFC-F$):$t is a non-deposit taking NBFC having not less
than @#5 of its assets in the nature of .ualifying assets ,hich
satisfy the follo,ing criteria+
a loan disbursed by an NBFC-F$ to a borro,er ,ith a rural
household annual income not e
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c total indebtedness of borro,er does not e
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@ Non-Banking Financial Company A Factors (NBFC-
Factors)+$t is a non-deposit taking NBFC engaged in the
principal business of factoring
Financial assets in factoring business should constitute at
least 4#5 of its total assets and its income derived from
factoring business should not be less than 4#5 of its grossincome
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%esiduary Non-Banking Company (%NBC)+ & non-banking
institution ,hich is a company and has principal business of
receiving deposits under any scheme or arrangement in one
lump sum or in installments by ,ay of contributions or in any
other manner' is also a NBFC (%esiduary non-banking
company)
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%B$ 0uidelines on NBFCs
Compulsory %egistration+ 1he %B$ (&mendment) &ct' 4'
provides for compulsory registration ,ith %B$ of all NBFCs
Net ,orth+ ntry point norm of %s 2 cr as the minimum net
o,ned funds from &pril 2'
aintenance of li.uid assets+ $nvest in approved securities an
amount not less than #5 but not less e
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%B$ 0uidelines on NBFCs
# Ceiling on .uantum of public deposits+
3oan : $nvestment Cos - # times of N6F if the companyhas N6F of %s 2# lacs and minimum investment grade creditrating ($0) and complies ,ith all prudential norms
With $0 credit rating and 2 5 C%&% A " times of N6F
Without $0 credit rating but C%&% #5 or above- # timesof N6F' or %s 7 cr ,hichever' is less
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%B$ 0uidelines on NBFCs
$nvestment in li.uid assets+
NBFCs- #5 of outstanding public deposit liabilities onthe last ,orking day of the second preceding .uarter' of
,hich
(i) not less than 7 5 in approved securities
(ii) not more than # 5 in term deposits ,ith banks
%NBCsA 75 of outstanding deposits
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%B$ 0uidelines on NBFCs
4 eriod of deposits+ No demand deposits
NBFCs-2 to 7 months
%NBCs-2 to @" months
Chit funds- to * months
@ Ceiling on deposit rate
NBFCs' NFCs' and Nidhis -2#5 pa (effective Nov
' 277)
%NBCs A inimum interest of "5 on daily deposits and
5 on others
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%B$ 0uidelines on NBFCs
&dvertisement : methodology for acceptance of deposits
9eposit acceptance form should contain certain
prescribed information' company to issue receipt for
deposits and maintain a deposit register
7 !ubmission of %eturns
&ll NBFCs have to submit periodic returns to %B$ at
.uarterly' half-yearly and annual intervals
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%B$ 0uidelines on NBFCs
rudential Norms for NBFC! A&pril *
6n %ecommendations of Narasimham Committee and !hahCommittee %B$ has prescribed follo,ing prudential norms for
NBFCs
$ncome %ecognition
$ncome including interest/discount or any other charge on
N&s should be recogni=ed only ,hen it is actually reali=ed&ny such income recogni=ed before the asset became N& andremaining unreali=ed should be reversed
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%B$ 0uidelines on NBFCs
Basis of identifying N& is the follo,ing Assets:$n respect of ,hich interest has remained overdue
for si< months
Term loans: $nclusive of unpaid interest ,hen the
installment/interest is overdue for months
Other current assets+ 1his refers to interest in respect of
debt/income on receivables that remain overdue for
months
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%B$ 0uidelines on NBFCs
Demand/Call loan+ 3oans that remained overdue for months or on ,hich interest remained overdue for months
Bills+ Bills that remain overdue for months
Lease Rentals/Hire-Purchase Installment+
$nstallments that have been overdue for 2 months
$ncome from $nvestment+ $ncome from dividends tobe accounted on cash basis $nterest income frombonds on accrual basis
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%B$ 0uidelines on NBFCs
Accounting Standards &ll &ccounting !tandards and0uidance Notes issued by $C&$ must be follo,ed
Accounting for Investments+ NBFC should frame an$nvestment olicy and the criteria to classify investmentsinto current and long term should be spelt out in the
policy
1he depreciation' if any' in each scrip should be fullyprovided for and appreciation' if any' ignored
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%B$ 0uidelines on NBFCs
Duoted Current $nvestments
1hese should for valuation purpose be grouped into i)e.uity shares ii) preference shares iii) debentures iv) govtsecurities v) units of mutual funds vi) others
1hese investments in each category should be valued atcost or market value ,hich ever is lo,er 9epreciation foreach category of investment should be charged to : 3
&/C
3ong term $nvestments: 1hese should be valued inaccordance ,ith $C&$
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%B$ 0uidelines on NBFCs
3. Asset Classification
NBFCs are re.uired to classify their assets into four broad groups+
i) !tandard &ssets+ & standard asset is one ,ith respect to ,hich nodefault in repayment of principal or payment of interest is perceived
ii) !ub-!tandard assets+ $t is one that has been classified as N& for aperiod not e
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%B$ 0uidelines on NBFCs
rovisioning of loans and advances Loans, advances & other credit acilities includin! "ills
#urchased and discounted:3oss &ssets
1he entire asset should be ,ritten off
Dou"tul Assets
a) 775 provision should be made to the e
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%B$ 0uidelines on NBFCs
b) $n addition' depending upon period for ,hich asset hasremained doubtful' provision to the e
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%B$ 0uidelines on NBFCs
Capital &de.uacy+ 1o maintain a minimum capital ratio of
1ier-$ and 1ier-$$ capital e.uivalent to 25 of aggregaterisk ,eighted assets
1otal 1ier $$ capital should not e
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%B$ 0uidelines on NBFCs
3oans against o,n shares+ NBFCs are prohibited fromlending against their o,n shares
# Concentration of credit/investments
NBFCs cannot lend to any single borro,er or single
group of borro,ers in e
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%B$ 0uidelines on NBFCs
%isk Weighted assets means ,eighted aggregate of assets 9egree ofcredit risk' e
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%B$ 0uidelines on NBFCs
&sset 3iability anagement
1he %B$ guidelines relate to interest and li.uidity risks
management systems in NBFCs ,hich form part of &3
function
1he &3 process rests on * pillars+ &3 $nformation !ystems
anagement $nformation !ystems
$nformation availability' accuracy' ade.uacy and
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%B$ 0uidelines on NBFCs
&3 6rgani=ation !tructure and %esponsibilities
3evel of top anagement involvement
&3 rocess %isk parameters
%isk identification
%isk measurement
%isk management %isk policies and tolerance levels
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