NBFC-MFI Systematically Important Companies By CS Sukhmendra Kumar


Definition of NBFC
 
An NBFC is a Company registered under the Companies Act, 1956 (‘Act, 1956’) or Companies Act, 2013 (‘Act, 2013’) and is engaged in the business of financial institution.
 
Section 45I(f) of the RBI Act, 1934 defines ‘‘Non-Banking Financial Company’’ as

  1. a financial institution which is a Company;
  2. a non-banking institution which is a Company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;
  3. such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify;
In order to carry on the business of NBFC, a Company has to register itself with the Reserve Bank of India under Section 45-IA of the Reserve Bank of India Act, 1934. Conditions as per Section 45-IA are-
 
  1. The applicant should be registered as a Company under Companies Act
  1. The minimum net-owned funds of the applicant should be Rs. 200 lakhs
TYPE OF NBFC
 
1. Based on the ability to accept deposit

  • Deposit taking NBFC
  • Non Deposit taking NBFC
           a) Systematically important NBFC with asset size of Rs. 500 Crores or more
         b) Non- Systematically important NBFC with asset size of less than Rs. 500 Crores or more
                                         

2. Based on Nature of Activities
 

S.No

Particulars/Category

Sub Category

1.    

Investment Activities

Investment Company

 

 

Core Investment Company

 

 

 

2.    

Lending Activities

Infrastructure Finance Company

 

 

Micro Finance Institution

 

 

Asset Finance Company

 

 

Infrastructure Debt Fund

 

 

Factoring Company

 
REGULATORY FRAMEWORK GOVERNING NON BANKING FINANCIAL COMPANIES

  1. Reserve Bank of India is the Apex body which regulate and governs functioning of Non Banking Financial Companies.
  1. Banking Laws (Miscellaneous Provisions) Act, 1963 was enacted with effect from 01.02.1964 to amend Reserve Bank of India Act, 1934 by inserting Chapter III-B(Act 55 of 1963) in the act which contains “provisions relating to non-banking institutions receiving deposits and financial institutions”.
  1. Central Government under Reserve Bank of India Act, 1934 is Ministry of Finance.
  1. Reserve Bank of India reports to Ministry of Finance.
  1. The Reserve Bank of India has started issuing Master Directions on all regulatory matters beginning January 2016. The Master Directions consolidate instructions on rules and regulations framed by the Reserve Bank under various Acts including banking issues and foreign exchange transactions.
  1. The process of issuing Master Directions involves issuing one Master Direction for each subject matter covering all instructions on that subject. Any change in the rules, regulation or policy is communicated during the year by way of circulars/press releases.
  1. The existing set of Master Circulars issued on various subjects will stand withdrawn with the issue of the Master Direction on the subject.
LIST OF MASTER DIRECTIONS APPLICABLE TO NBFC BASED ON ABILITY TO ACCEPT DEPOSIT AND NATURE OF ACTIVITIES

S.No

Type of Non Banking Financial Company

Principal Directions

1.    

Non Banking Financial Companies Deposit Taking

 

Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016

2.    

Non Banking Financial Company Systematically Important Non Deposit taking Company and Non Banking Financial Companies Deposit Taking

 

 

Non-Banking Financial Company -Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016

3.    

Non Banking Financial Company Non Systematically Important Non Deposit taking Company

 

Non-Banking Financial Company  Non Systemically Important Non Deposit taking Company (Reserve Bank) Directions, 2016

4.    

Non Banking Financial Company Core Investment Companies

Core Investment Companies (Reserve Bank) Directions, 2016


Definition of NBFC-MFI
 
“Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI)” means a non-deposit taking NBFC (other than a company formed and registered under Section 25 of the Companies Act, 1956/ Section 8 of the Companies Act, 2013) that fulfils the following conditions:
 
  • Minimum Net Owned Funds of ? 5 crore. (For NBFC-MFIs registered in the North Eastern Region of the country, the minimum NOF requirement shall stand at 2 crore).
  • Not less than 85% of its net assets are in the nature of “qualifying assets.”
For the purpose of above definition the term net asset and qualifying assets mean-
 
“Net assets” shall mean total assets other than cash and bank balances and money market instruments.
 
Qualifying Assets-Qualifying assets shall mean a loan which satisfies the following criteria:
 
  1. Loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding Rs 1,25,000 or urban and semi-urban household income not exceeding Rs 2,00,000.
  2. Loan amount does not exceed Rs 75,000 in the first cycle and Rs 1,25,000 in subsequent cycles.
  3. Total indebtedness of the borrower does not exceed Rs 1,25,000.
The criteria of Qualifying Assets has been revised by Reserve Bank of India vide Notification RBI/2019-20/95 DOR.NBFC (PD) CC. No.103/22.10.038/2019-20 dated November 08, 2019.

CAPITAL ADEQUACY RATIO NORMS

1. NBFC-MFIs shall maintain a capital adequacy ratio or CAR (including Tier-I and Tier-II capital) not be less than 15% of its aggregate risk-weighted assets. The total of Tier-II capital, at any time, should not exceed 100% of Tier-I Capital.
 
Tier-I Capital Mean 
 
  • owned fund reduced by
  • investment in shares of other non-banking financial companies 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;
Tier-2 Capital Means-
 
  • preference shares other than those which are compulsorily convertible into equity;
  • revaluation reserves at discounted rate of fifty five percent;
  • 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 percent of risk weighted assets;
  • hybrid debt capital instruments;
  • subordinated debt; and
  • 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.
2. The NBFC MFIs in the state of Andhra Pradesh (now Telangana & AP) which have more than 25% loan portfolio will have to maintain CRAR at 15%.
 
ASSET CLASSIFICATION
 
1. Standard asset means the asset in respect of which, no default in repayment of principal or payment of interest is perceived and which does not disclose any problem nor carry more than normal risk attached to the business;

2. Non-performing asset means an asset for which, interest/principal payment has remained overdue for a period of 90 days or more.
 
PROVISIONING RULES

  • NBFC MFIs in the earlier state of Andhra Pradesh (now Telangana and AP) have had to provide sizeable amounts towards the non-performing assets. To reflect the true and fair picture of the financials of the NBFC MFI in the Balance Sheet, the provisioning made towards the Andhra Pradesh (now Telangana and AP) was to be as per the current provisioning norms i.e. Prudential Norms laid by RBI for SI-NBFC (Non-Deposit Accepting or Holding) or Non-SI-NBFC (Non-Deposit Accepting or Holding).
  • The aggregate loan provision to be maintained by NBFC-MFI, from the non-AP portfolio, should never go below:
  1. 1% of the outstanding loan portfolio, or
  2. 50% of the aggregate loan instalments those are overdue for more than 90 days and less than 180 days and 100% of the aggregate loan instalments which are outstanding for 180 days or more.
REGULATIONS CONCERNING LOANS & FUNDING
 
PRICING OF CREDIT
 
  • The margin cap, cap on the difference between the amount charged to the borrower and the cost of funds to the NBFC-MFI, must not exceed 10% for large MFIs (loan portfolios over Rs.100 crore) and 12% for the others.
  • The interest rates charged by an NBFC MFI to its borrowers is to be the lower of:
  1. The cost of funds plus the margin (10% or 12% as mentioned above), or
  1. The average base rate of the 5 largest commercial banks by assets multiplied by 2.75. This rate shall be advised by RBI on the last working day of the previous quarter, which shall determine interest rates for the ensuing quarter.
  • NBFC-MFIs shall ensure that the average interest rate on loans sanctioned during a quarter does not exceed the average borrowing cost during the preceding quarter plus the margin, within the prescribed cap.
  • Maximum variance permitted for individual loans between the minimum and maximum interest rate cannot be more than 4%.
  • The average interest paid and charged by the MFI is to be calculated on average monthly balances of outstanding borrowings and loan portfolio respectively. The figures to be certified by Statutory Auditors, annually, and also disclosed in the Balance Sheet.
  • Processing charges shall not be more than 1% of gross loan amount. Processing charges need not be included in the margin cap or the interest cap.
  • NBFC-MFIs shall recover only the actual cost of insurance for group, or livestock, life, health for borrower and spouse. Administrative charges, where recovered, shall be as per IRDA guidelines.
FAIR PRACTICES CODE IN LENDING
 
Transparency in Interest Rates

  • The pricing of the loan should include only 3 parts. The interest charge, the processing charge and the insurance premium (inclusive of the administrative charges).
  • No penalty will be charged on delayed payment.
  • No Security Deposit to be collected from the borrower.
  • The form of the loan agreement has to be standardised.
  • Every borrower must be provided a loan card with:
  1. the effective rate of interest charged,
  2. all other terms and conditions attached to the loan,
  3. information which identify the borrower, and acknowledgments by the NBFC MFI of all repayments including instalments received and the final discharge,
  4. The entries in the Loan Card to be made in the Vernacular language.
  5. The effective rate of interest charged on loans should be prominently displayed in all offices and on the website of the NBFC MFI.
  6. Non-credit products issued shall be with full consent of the borrowers and fee structure shall be communicated in the loan card itself.
MULTIPLE-LENDING, OVER-BORROWING & GHOST-BORROWERS

  • NBFC MFIs can lend to individual borrowers whether they are members of the Joint Liability Group(JLG)/Self Help Group(SHG).
  • A borrower must not be a member of more than one SHG/JLG.
  • Same borrower not be financed by more than 2 NBFC MFI.
  • The interim time between the grant of the loan and the due date of the first instalment should not be less than the frequency of repayment.
  • Recovery of loans given not following the regulations to be suspended till all prior existing loans are repaid wholly.
  • All sanctioning and disbursement of loans should be done only at a central location and more than one individual should be involved in this function. With the disbursement function to be closely supervised.
METHODS OF RECOVERY

  1. NBFC MFIs shall ensure that the Fair Practices Code is followed while recruitment, training, and supervision of field staff.
  1. Recovery should be non-coercive and be made only at a central designated place. If the borrower fails to come to the central designated place on 2 or more successive occasions, then field staff shall be allowed to recover the loan.
CHANNELIZING AGENTS FOR SCHEMES OPERATED BY VARIOUS GOVERNMENT AGENCIES

  1. The department of channelizing agents shall be considered as a separate business segment. These loans shall not be included for ascertaining the minimum qualifying assets criteria of 85%.
  2. The interest on such loans not to be included while calculating the difference between the maximum and minimum interest rates.
  3. Cost of such funds not to be considered while ascertaining the average cost of funds or the interest rates charged to borrowers.
  4. Proper accounts and records for such loans as well as funding from concerned agencies shall be maintained by the NBFC MFI. Separately disclosed in the financial statements.
  5. The asset classification, income recognition, provisioning norms, and other prudential norms, as applicable to NBFC MFIs, apply here as well. Except when the NBFC MFI does not bear any credit risk.
  6. All such loans to be reported to CICs to restrict multiple borrowings of a borrower.
FORMATION OF SRO AND MEMBERSHIP IN CIC

All NBFC-MFIs shall become member of at least one Self-Regulatory Organization (SRO) which is recognized by the Bank and shall also comply with the Code of Conduct prescribed by the SRO. Further, the SRO holding recognition from the Bank shall have to adhere to a set of functions and responsibilities as mentioned in Annex XI. The same may be modified by the Bank from time to time to improve the efficiency of the sector. RBI mandates every NBFC MFI has to become a member of at least one Credit Information Company (CIC) established under the CIC Regulation Act 2005. Provide timely and accurate data to the CICs and use the data available with them to ensure compliance with the conditions regarding membership of JLG/SHG, level of indebtedness and sources of funds. NBFC-MFIs may rely on self-certification from the borrowers and their own local enquiries on these aspects as well as the annual household income.
 
CORPORATE GOVERNANCE

  • Formation of committees, namely, Audit, Nomination, Asset Liability Management and Risk Management Committee;
  • Framing a policy for ascertaining the fit and proper criteria;
  • Obtain a declaration and undertaking along with a Deed of Covenant from the existing directors and upon every appointment and re-appointment;
  • Submission of a statement on change of directors and a certificate from the Managing Director confirming the compliance of fit and proper criteria;
  • Disclosure requirement w.r.t the Annual Financial Statements is to be complied with;
  • Framing internal guidelines on corporate governance.
REPORTING REQUIREMENTS FOR SYSTEMICALLY IMPORTANT, NON DEPOSIT TAKING NBFC

S.No

Name of Return

Periodicity

Reference Date

Due Date

Reporting Time

1

NBS7

Quarterly

31st March/ 30th June/ 30th Sept/ 31st Dec.

15th April/ 15th July/ 15th Oct./ 15th Jan.

15

2

NBFCs-ND-SI 500cr

Quarterly

31st March/ 30th June/

30th Sept./ 31st Dec.

15th April/ 15th July/

15th Oct./ 15th Jan.

15

3

ALM-1

Quarterly

31st March/ 30th June/ 30th Sept./ 31st Dec.

15th April/ 15th July/ 15th Oct./ 15th Jan.

15

4

ALM-2 & 3

Half yearly

31st March/ 30th Sept.

30th April/ 30th Oct.

30

5

ALM-(NBFC-ND-SI)

Annual

31st March

15th April

15

6

Branch Info return

Quarterly

31st March/ 30th June/ 30th Sept./ 31st Dec.

15th April/ 15th July/ 15th Oct./ 15th Jan.

15

7

Reporting to Central Repository of

Information on Large Credits (CRILC)

Quarterly

31st March/ 30th June/ 30th Sept./ 31st Dec.

21st April/ 21st July/ 21st Oct/ 21st Jan

21

8

Reporting of Special Mention Account status (SMA-2 return)

Weekly

On every Friday

 

 

9

Statutory Auditor Certificate

Annual

31st March

One month from the date of finalization of Balance Sheet. Not later than 31st December.

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