Non-Banking Financial Companies

(NBFCs)

What are NBFCs?

NBFCs are financial intermediaries engaged primarily in the
business of accepting deposits and delivering credit.
Clause (b) of Section 45-I of Chapter IIIB of RBI Act, 1934
defines an NBFC as:
(i) a financial institution, which is a company
(ii) a non-banking financial 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
(iii) such other non-banking institutions or class of such
institutions, as RBI may with previous approval of central
govt. may specify.

What are NBFCs?

A Non-Banking Financial Company (NBFC) is a company
registered under Companies Act, 1956 engaged in the business
of
loans
and
advances,
acquisition
of
shares/stocks/bonds/debentures/securities issued by Govt. or
local authority or other marketable securities of a like nature,
leasing, hire-purchase, insurance business, chit business but
does not include any institution whose 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.

Types of NBFCs
They are classified as:
1. Asset Finance Company : It means a company which 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 etc.
2. Investment Company: A company that is a financial institution
carrying on as its principal business, the acquisition of
securities
3. Loan Company: A company that is a financial institution
whose principal business is providing finance, whether by
making loans or advances or otherwise for any activity other
than its own but does not include an asset finance company
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4. Infrastructure Finance Company (IFC): IFC is a non-banking

finance company
a) which deploys at least 75% of its total assets in infrastructure
loans,
b) has a minimum Net Owned Funds of Rs. 300 crore,
c) has a minimum credit rating of A or equivalent
d) and a CRAR of 15%.

5. Systemically Important Core Investment Company (CIC-NDSI): It is an NBFC carrying on business of acquisition of shares
& securities which satisfies the following conditions:(a) it holds not less than 90% of its Total Assets in the form of
investment in equity shares, preference shares, debt or loans in
group companies;
(b) its investments in equity shares (including instruments
compulsorily convertible into equity shares within a period not
exceeding 10 years from date of issue) in group companies
constitutes not less than 60% of its Total Assets;
(c) it does not trade in its investments in shares, debt or loans in
group companies except through block sale for purpose of
dilution or disinvestment;

(d) it 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.
(e) Its asset size is Rs 100 crore or above and
(f) It accepts public funds

6. Infrastructure Debt Fund: It is a company registered as NBFC to

facilitate flow of long term debt into infrastructure projects. It
raises resources through issue of Rupee or Dollar denominated
bonds of minimum 5 year maturity. Only Infrastructure Finance
Companies (IFC) can sponsor IDF-NBFCs.
7. Non-Banking Financial Company - Micro Finance Institution
(NBFC-MFI): It is a non-deposit taking NBFC having not less
than 85% of its assets in the nature of qualifying assets which
satisfy the following criteria:
a. loan disbursed by an NBFC-MFI to a borrower with a rural
household annual income not exceeding Rs. 60,000 or urban
and semi-urban household income not exceeding Rs. 1,20,000;
b. loan amount does not exceed Rs. 35,000 in first cycle & Rs.
50,000 in subsequent cycles;

c. total indebtedness of borrower does not exceed Rs. 50,000;

d. tenure of loan not to be less than 24 months for loan amount in
excess of Rs. 15,000 with prepayment without penalty;
e. loan to be extended without collateral;
f. aggregate amount of loans, given for income generation, is not
less than 75% of total loans given by MFIs;
g. loan is repayable on weekly, fortnightly or monthly installments
at choice of borrower

8. Non-Banking Financial Company Factors (NBFCFactors): It is a non-deposit taking NBFC engaged in the
principal business of factoring.
Financial assets in factoring business should constitute at
least 75% of its total assets and its income derived from
factoring business should not be less than 75% of its gross
income.

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 Residuary Non-Banking Company (RNBC): A non-banking

institution which is a company and has principal business of
receiving deposits under any scheme or arrangement in one
lump sum or in installments by way of contributions or in any
other manner, is also a NBFC (Residuary non-banking
company).

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RBI Guidelines on NBFCs.

Compulsory Registration: The RBI (Amendment) Act, 1997,

provides for compulsory registration with RBI of all NBFCs.
Net worth: Entry point norm of Rs. 2 cr. as the minimum net
owned funds from April 21, 1999.
Maintenance of liquid assets: Invest in approved securities an
amount not less than 5% but not less exceeding 25% of
deposits outstanding at close of business on last working day
of the second preceding quarter.
Creation of Reserve Fund: To create a reserve fund of 20% of
net profit every year.
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RBI Guidelines on NBFCs.

5. Ceiling on quantum of public deposits:

Loan & Investment Cos. - 1.56 times of NOF if the company
has NOF of Rs. 25 lacs and minimum investment grade credit
rating (MIG) and complies with all prudential norms.
With MIG credit rating and 12 % CRAR 4 times of NOF
Without MIG credit rating but CRAR 15% or above- 1.5 times
of NOF, or Rs. 10 cr. whichever, is less.

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RBI Guidelines on NBFCs

6. Investment in liquid assets:

NBFCs- 15% of outstanding public deposit liabilities on
the last working day of the second preceding quarter, of
which
(i) not less than 10 % in approved securities.
(ii) not more than 5 % in term deposits with banks.
RNBCs 10% of outstanding deposits
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RBI Guidelines on NBFCs.

7. Period of deposits: No demand deposits
NBFCs-12 to 60 months
RNBCs-12 to 84 months
Chit funds- 6 to 36 months
8. Ceiling on deposit rate
NBFCs, MNFCs, and Nidhis -12.5% p.a. (effective Nov.
1, 2001)
RNBCs Minimum interest of 4% on daily deposits and
6% on others.
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RBI Guidelines on NBFCs.

9. Advertisement & methodology for acceptance of deposits
Deposit acceptance form should contain certain
prescribed information, company to issue receipt for
deposits and maintain a deposit register.
10. Submission of Returns

All NBFCs have to submit periodic returns to RBI at

quarterly, half-yearly and annual intervals.
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RBI Guidelines on NBFCs.

Prudential Norms for NBFCS April 1993
On Recommendations of Narasimham Committee and Shah
Committee RBI has prescribed following prudential norms for
NBFCs
1. Income Recognition
Income including interest/discount or any other charge on
NPAs should be recognized only when it is actually realized.
Any such income recognized before the asset became NPA and
remaining unrealized should be reversed.
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RBI Guidelines on NBFCs.

Basis of identifying NPA is the following

Assets: In respect of which interest has remained overdue
for six months
Term loans: Inclusive of unpaid interest when the
installment/interest is overdue for 6 months
Other current assets: This refers to interest in respect of
debt/income on receivables that remain overdue for 6
months

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RBI Guidelines on NBFCs.

Demand/Call loan: Loans that remained overdue for
6 months or on which interest remained overdue for 6
months
Bills: Bills that remain overdue for 6 months

Lease
Rentals/Hire-Purchase
Installment:
Installments that have been overdue for 12 months

Income from Investment: Income from dividends to

be accounted on cash basis. Interest income from
bonds on accrual basis
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RBI Guidelines on NBFCs.

AccountingStandardsAll Accounting Standards and
Guidance Notes issued by ICAI must be followed

AccountingforInvestments: NBFC should frame an

Investment Policy and the criteria to classify investments
into current and long term should be spelt out in the
policy

The depreciation, if any, in each scrip should be fully
provided for and appreciation, if any, ignored

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RBI Guidelines on NBFCs.

Quoted Current Investments
These should for valuation purpose be grouped into i)
equity shares ii) preference shares iii) debentures iv) govt
securities v) units of mutual funds vi) others
These investments in each category should be valued at
cost or market value which ever is lower. Depreciation for
each category of investment should be charged to P& L
A/C
Long term Investments: These should be valued in
accordance with ICAI
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RBI Guidelines on NBFCs.

3.AssetClassification
NBFCs are required to classify their assets into four broad groups:

i) Standard Assets: A standard asset is one with respect to which no

default in repayment of principal or payment of interest is perceived.

ii) Sub-Standard assets: It is one that has been classified as NPA for a
period not exceeding 18 months

iii) Doubtful assets: It means an asset that remains a sub-standard asset

for a period exceeding 18 months
Loss assets: It is one where loss has been identified by the NBFC

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RBI Guidelines on NBFCs.

. Provisioning of loans and advances

Loans, advances & other credit facilities including bills

purchased and discounted: Loss Assets
The entire asset should be written off
Doubtful Assets
a) 100% provision should be made to the extent to which
the advance is not covered by the realizable value of the
security to which the NBFC has a recourse
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RBI Guidelines on NBFCs.

b) In addition, depending upon period for which asset has
remained doubtful, provision to the extent of 20% to 50%
of secured portion should be made on the following basis
Period for which asset considered doubtful
% of
provision
Up to 1 yr
20
1-3 yr
30
> 3yr
50
Sub-standard Assets A general provision of 10% of total
outstanding is made in case of sub-standard assets

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RBI Guidelines on NBFCs.

Capital Adequacy: To maintain a minimum capital ratio of
Tier-I and Tier-II capital equivalent to 12% of aggregate
risk weighted assets
Total Tier II capital should not exceed 100% of Tier-I
capital at any point
Tier I capital means equity capital, free reserves, share
premium a/c, capital reserves excluding reserves created
by revaluation of assets, as reduced by accumulated losses,
book value of intangible assets, and deferred revenue
expenditure
Tier II capital consists of Preference shares, general
provision & loss reserves, hybrid debt & subordinated debt
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RBI Guidelines on NBFCs.

Loans against own shares: NBFCs are prohibited from
lending against their own shares
5. Concentration of credit/investments
NBFCs cannot lend to any single borrower or single
group of borrowers in excess of 15 and 25% respectively
of their net owned funds
Permissible ceiling on loans & investments taken together
is 25% to a single party and 40% to single group of
parties

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RBI Guidelines on NBFCs.

Risk Weighted assets means weighted aggregate of assets. Degree of
credit risk, expressed as percentage weight ages have been assigned to
b/s assets
Weighted assets
% weights
Cash and bank balance
0
Investments
a) Approved securities
0
b) Bonds of ps banks, FD/CD/bonds of PFIs
100
c) units of UTI
20
d) shares of companies/bonds/CPs/units of MFs 100
Current assets
Inter corporate loans/deposits
100
Loans to staff
100
Bills purchased or discounted
100
Fixed assets
Assets leased out
100
Premises
100
Furniture and Fixtures
100

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RBI Guidelines on NBFCs.

Asset Liability Management
The RBI guidelines relate to interest and liquidity risks
management systems in NBFCs which form part of ALM
function
The ALM process rests on 3 pillars:
ALM Information Systems
Management Information Systems
Information availability, accuracy, adequacy and
expediency

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RBI Guidelines on NBFCs.

ALM Organization
Structure and Responsibilities
Level of top Management involvement
ALM Process
Risk parameters
Risk identification
Risk measurement
Risk management
Risk policies and tolerance levels

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