Chapter 2 - NBFC Compliance

Overview

Regulatory compliance for Non-Banking Financial Companies (NBFCs) has undergone significant changes, with a focus on NBFCs categorized as NBFC-ND with assets under management (AUM) below ₹100 crore. The regulatory framework for NBFCs has been upgraded, and a new regulatory structure has been implemented. There have been amendments in various areas such as NPA classification, board experience requirement, IPO financing ceiling, risk management committee, enhanced disclosures, loans to directors and senior officers, and additional regulations, including leverage ratio, CRAR/exposure norms, prudential regulation, and conduct of business regulations. Furthermore, specific guidelines have been introduced for loans against the pledge of gold ornaments and jewellery, including maximum loan limits, loan duration, interest charges, valuation of gold, and temporary relaxations. These regulatory changes aim to strengthen the stability and transparency of NBFCs and enhance their risk management practices.

Regulatory Compliance for NBFCs

The focus of regulatory compliance is on NBFCs categorized as NBFC-ND, with assets under management (AUM) below ₹100 crores.

NBFC Registration With The RBI

Starting a financial business activity necessitates a thorough understanding of the registration process. NBFCs, like other financial institutions, must be registered with a regulatory body such as the Reserve Bank of India (RBI). This ensures that financial activities are conducted within the framework of established regulations to maintain the integrity and stability of the financial environment.

Check out the list of documents for an NBFC-ND to register themselves & get their licence here

NBFC Application Form.

For online registration, check out the XBRL site.

Upgraded Regulatory Framework for NBFCs: The Scaled-Based Regulatory Framework (SBRF)

Regulatory Structure

NBFC-ND is categorized based on its size, activities, and perceived risk as follows:

The Base Layer comprises two categories of entities. The first category encompasses non-deposit-taking NBFCs with assets below ₹1,000 crores. The second category includes NBFCs involved in the following activities: (i) NBFC-Peer to Peer Lending Platform (NBFC-P2P), (ii) NBFC-Account Aggregator (NBFC-AA), (iii) Non-Operative Financial Holding Company (NOFHC), and (iv) NBFCs that do not deal with public funds or have direct customer interactions.

Regulatory Changes
  • All references to NBFC-ND are now referred to as NBFC-BL
  • NOF: The mandated minimum Net Owned Fund (NOF) for NBFC-ICC, NBFC-MFI, and NBFC-Factors is set to rise to ₹10 crore by the year 2027. Conversely, for NBFC-P2P, NBFC-AA, and NBFCs that do not handle public funds or engage directly with customers, the NOF stipulation will remain at ₹2 crores. It is essential to highlight that there are no modifications to the current regulatory minimum NOF requirements for NBFCs such as Infrastructure Debt Fund (IDF), Infrastructure Finance Company (IFC), Mortgage Guarantee Companies (MGCs), Housing Finance Companies (HFC), and Systemically Important Core Investment Companies (SPD). These NBFCs will continue to abide by the existing NOF criteria as specified by the regulatory authorities.
  • Classification of Non-Performing Assets (NPAs): The existing norm for NPA classification has been modified, stating that an asset will be classified as an NPA if it remains overdue for more than 90 days for all categories of NBFCs. A gradual transition period is provided for NBFCs in the Base Layer to comply with the 90-day NPA norm, as outlined below:
  • Timeline
  • Overdue Period
  • By March 31, 2024
  • >150 days overdue
  • By March 31, 2025
  • >120 days overdue
  • By March 31, 2026
  • >90 days overdue
  • Board Experience Requirement: In recognition of the importance of professional expertise in managing NBFCs, it is mandated that at least one director must possess relevant experience from working in a bank or NBFC.
  • Ceiling on IPO Financing: A maximum limit of ₹1 crore per borrower is set for providing financing for subscribing to Initial Public Offers (IPOs). However, NBFCs have the flexibility to establish more conservative limits if they choose to do so.
  • Risk Management Committee: To enhance focus on risk management, NBFCs are required to establish a Risk Management Committee (RMC) either at the Board or executive level. The RMC’s responsibility is to assess the overall risks faced by the NBFC, including liquidity risk, and report its findings to the Board.
  • Enhanced Disclosures: Disclosure requirements will be expanded to encompass various aspects such as types of exposure, related party transactions, loans granted to Directors/Senior Officers, and customer complaints.
  • Loans to Directors, Senior Officers, and Relatives: NBFC-BLs are required to establish a Board-approved policy concerning the provision of loans to directors, senior officers, and the relatives of directors. Additionally, this policy should also encompass situations where directors or their relatives possess significant ownership stakes in entities. The objective of this policy is to ensure transparency, fairness, and appropriate governance in the process of granting loans to these individuals and entities associated with the NBFC-BL.
Additional Regulations:
  • Leverage Ratio: NBFCs must maintain a leverage ratio that does not exceed 7. This ensures a prudent level of leverage in their operations.
  • CRAR/Exposure Norms: There are no specific Capital to Risk-Weighted Assets Ratio (CRAR) or exposure norms mandated for NBFCs. This provides flexibility in managing their capital and exposure requirements.
  • Prudential Regulation: NBFCs are not subjected to prudential regulations. This allows for a more streamlined regulatory framework tailored to the unique characteristics of NBFCs.
  • Conduct of Business Regulations: Certain conduct of business regulations, such as Know Your Customer (KYC) norms and Fair Practices Code (FPC), do not apply to NBFCs that do not have direct interaction with customers. This recognizes the differences in business models and customer interfaces among different types of NBFCs.

Guidelines Against Specific Loan: The RBI Gold Loan Guidelines

Loan Secured by the Pledge of Gold Ornaments and Jewellery

  • An FI can determine the maximum limit for loans granted against the pledge of gold jewellery and ornaments.
  • The loan duration should not exceed 12 months from the date of approval.
  • Interest will be charged on a monthly basis and recognized as accrued income if the account is classified as a ‘standard’ account. This rule is relevant for both fresh and pre-existing loans.
  • The loans will be subject to existing norms regarding income recognition, asset classification, and provisioning once the principal and interest become overdue.

Valuation of Gold for Loans

  • The amount of loans issued against the pledge of gold ornaments and jewellery should not surpass 75% of the gold’s appraised value.
  • To alleviate the economic impact of the Covid-19 pandemic, the permissible loan-to-value ratio (LTV) for loans against pledges of gold ornaments and jewellery had been increased from 75% to 90%. This higher LTV ratio was applicable until March 31, 2021, to help borrowers overcome temporary liquidity challenges caused by COVID-19. From April 1, 2021, the LTV ratio for fresh gold loans has reverted to 75%.
  • The FI can use historical spot gold price data publicly disseminated by a regulated commodity exchange. This data can be used in addition to the prices disseminated by the India Bullion and Jewellers Association Ltd. The purpose is to ensure the consistent and reliable valuation of gold for loan purposes.

Conclusion

The regulatory compliance landscape for Non-Banking Financial Companies has undergone significant transformations, with a focus on strengthening the sector’s stability and risk management practices. The upgraded regulatory framework, along with the revised NPA classification norms, board experience requirements, enhanced disclosures, and guidelines for loans against gold ornaments and jewellery, aims to ensure the soundness and transparency of NBFC operations. The introduction of XBRL filings and the adoption of technological advancements further streamline the reporting process. These regulatory changes reflect the Reserve Bank of India’s commitment to maintaining a robust and resilient NBFC sector, while also addressing the evolving needs and challenges of the industry. By adhering to these regulations and embracing best practices, NBFCs can foster trust, attract investments, and contribute to the overall growth of the financial system.

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