Non-Banking Financial Companies

The Non- Banking Financial Companies have seen tremendous growth in past few years with the development of larger companies carrying out varied range of activities and having asset base of more than 100 Crores. In light of the widening ambit of NBFCs and lighter regulations regarding it, Reserve Bank of India, recently released a report on Non Banking Financial Companies (NBFC) prepared by Usha Thorat Committee. It is important for a Non Banking Financial Company to know how these regulations affect the functioning of NBFCs.

Norms for NBFC

Principle Business: Asset requirement for NBFC

The Thorat Committee makes it important for an NBFC to ensure that the financial assets of an NBFC is 75 per cent or more of total assets and income from these financial assets exceeds 75 per cent or of total income.

A period of 30 days has been given to NBFCs to comply with the norm related to asset and income requirement.

Registration of NBFC

The Reserve Bank under this new notification, exempts all the NBFC that does not take deposit from the requirement of registering with RBI, in case their individual asset is not more than 50 crore. NBFCs with the asset size below Rs. 1000 crore which are not accessing public fund are also excluded from registation with RBI.

The Committee also suggests that the existing Non Deposit taking NBFCs with asset size of less than 50 Crores should deregister themselves.

As given in the RBI Report, the spirit behind such exemptions is not to create entry barriers for small innovative players from entering the NBFC sector especially for lending to small businesses, but to refocus regulatory resources to where the risks may lie. Regulatory directions issued by RBI to registered NBFCs would also apply to NBFCs that may be exempted from the requirement of obtaining Certificate of Registration.

Requirements to be fulfilled by registered NBFC

It is important for all the registered NBFCs to take prior approval from the Reserve Bank in case of change in control or transfer of shareholding directly or indirectly in excess of 25 percent of the paid up capital of the economy.

Prior approval of RBI shall be required also in case of any mergers of NBFC as stipulated under Section 391-94 of the Companies Act, 1956 or acquisition by or of an NBFC, governed by the SEBI Regulations for Substantial Acquisitions of Shares and Takeover.

Convergence in Regulation

Under Thorat Committee Report, Tier I capital of NBFCs is supposed to be at 12%. As of now NBFCs’ capital adequacy requirement is at 15% wherein there is no stringent stipulation of tier I or tier II capital.

Liquidity ratio to be introduced for 30 days

RBI has recommended maintaining a liquidity ratio of for 30 days. The Liquidity Ratio should be introduced for all registered NBFCs such that cash bank balances and holdings of government securities fully cover the gaps, if any, between cumulative outflows and cumulative inflows for the first 30 days. The provision denotes that an NBFC has to set aside cash balance equivalent to its debt payments due every month.

Other regulatory measures include raising the risk weights for NBFCs, not sponsored by banks to 150% for capital market exposures and 125% for commercial real estates.

Also NBFCs may be given be given benefits under Securitisation and Reconstruction of Financial Assets And Enforcement of Security Interest or SARFAESI Act, under the Act, NBFC need not move to the court to auction underlying assets to recover loan dues. It will just publish a newspaper notice before such auction.

The recommendation given by Thorat Committee is supposed to build a strong and resilient financial sector while bringing in effective changes in NBFC Sector. However, the RBI report is not in form of guidelines but recommendation. It essential to couple these recommendations with legislative changes for making the recommendations effective.

Srishti Aishwarya Shrivastava (3rd year, NUJS)