Tag Archives: NBFCs

aadhar authentication e-KYC licence

RBI is vide its circular dated 13th September, 2021 opening up the window for NBFCs, payment system providers and payment system participants to obtain aadhar authentication e-KYC licence (KYC User Agency) or sub KUA. What is this now? I wonder what happened to the Central KYC registry. There are no parameters specified, which means any such NBFCs etc. can apply?


Application for Aadhaar e-KYC Authentication Licence

In terms of Section 11A of the PML Act, 2002, entities other than banking companies may, by notification of the Central Government, be permitted to carry out authentication of client’s Aadhaar number using e-KYC facility provided by the Unique Identification Authority of India (UIDAI). Such notification shall be issued only after consultation with UIDAI and the appropriate regulator.

A detailed procedure for processing of applications under the aforementioned Section for use of Aadhar authentication services by entities other than banking companies has been provided by the Department of Revenue, Ministry of Finance vide their circular dated May 9, 2019.

2. Accordingly, Non-Banking Finance Companies (NBFCs), Payment System Providers and Payment System Participants desirous of obtaining Aadhaar Authentication License – KYC User Agency (KUA) License or sub-KUA License (to perform authentication through a KUA), issued by the UIDAI, may submit their application to this Department for onward submission to UIDAI. The applications can also be forwarded over email. The format of the application is provided in the Annex to this circular.

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priority sector lending to NBFCs

Priority Sector Lending (PSL) – Lending by banks to NBFCs for On-Lending

Please refer to our Circular No. RBI/2019-20/179 FIDD.CO.Plan.BC.No.19/04.09.01/2019-20 dated March 23, 2020 advising, inter alia, that the bank loans to registered NBFCs (other than MFIs) for on-lending will be eligible for classification as priority sector under Agriculture and Micro & Small Enterprises up to March 31, 2021 and will be reviewed thereafter.

2. As announced in the Statement on Developmental and Regulatory Policies dated April 7, 2021, with a view to ensure continued availability of credit to these sectors to aid faster economic recovery, it has been decided to extend the PSL classification for lending by banks to NBFCs for on-lending by six months i.e. up to September 30, 2021. However, bank loans to HFCs for on-lending for the purpose of housing, as prescribed in para 23 of our Master Direction on PSL dated September 4, 2020, will continue on an on-going basis. Further, existing loans disbursed under the on-lending model will continue to be classified under Priority Sector till the date of repayment/maturity.

3. All other guidelines as issued vide circulars FIDD.CO.Plan.BC.7/04.09.01/2019-20 dated August 13, 2019FIDD.CO.Plan.BC.No.19/04.09.01/2019-20 dated March 23, 2020 and Master Directions on PSL dated September 4, 2020 will continue to apply.

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furnishing of credit information

RBI has vide its circular dated 12th March, 2021 asked banks, financial institutions, NBFCs, co-operative banks to report on loans which were restructured due to the covid-19 pandemic.

This information is given by banks etc. to Credit Information Companies to enable proper data capturing by these data companies. The gist of the circular is given below:

2. The Uniform Credit Reporting Format has two Annexes. The Annex-I contains two formats for credit reporting, viz., Consumer Bureau and Commercial Bureau, whereas Annex-II contains credit reporting format for Micro Finance Institution (MFI) segment.

3. It has now been decided to modify the aforesaid three formats as under:

(i) Consumer Bureau: The label of the field ‘Written off and Settled status’ is modified as ‘Credit Facility Status’ and it will also have a new catalogue value, viz., ‘Restructured due to COVID-19’.

(ii) Commercial Bureau: The existing field ‘Major reasons for restructuring’ will have a new catalogue value, viz., ‘Restructured due to COVID-19’.

(iii) MFI Bureau: The existing field ‘Account status’ will have a new catalogue value, viz., ‘Restructured due to COVID-19’.

4. The modifications are being made to enable banks/AIFIs/NBFCs to report the information relating to restructured loans to CICs as envisaged in circular DOR.No.BP.BC.3/21.04.048/2020-21 dated August 6, 2020, on the Resolution Framework for COVID-19 related stress.

5. Banks/AIFIs/NBFCs should make necessary modification to their systems and commence reporting the above information to CICs within two months from the date of this circular. CICs shall make necessary modifications to their system to reflect the above changes.

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risk based internal audit

An independent and effective internal audit function in a financial entity provides vital assurance to the Board and its senior management regarding the quality and effectiveness of the entity’s internal control, risk management and governance framework. The essential requirements for a robust internal audit function include, inter alia, sufficient authority, proper stature, independence, adequate resources and professional competence.

2. The range and commonality of risks faced by Supervised Entities (SEs) would warrant effective and harmonized systems and processes for the internal audit function across the SEs based on certain common guiding principles.

3. The introduction of Risk-Based Internal Audit (RBIA) system was mandated for all Scheduled Commercial Banks (except Regional Rural Banks) vide our circular DBS.CO.PP.BC.10/11.01.005/2002-03 dated December 27, 2002, which was further supplemented vide circular DoS.CO.PPG./SEC.04/11.01.005/2020-21 dated January 07, 2021. It has now been decided to mandate RBIA framework for the following Non-Banking Financial Companies (NBFCs) and Primary (Urban) Co-operative Banks (UCBs):

  1. All deposit taking NBFCs, irrespective of their size;
  2. All Non-deposit taking NBFCs (including Core Investment Companies) with asset size of ₹5,000 crore and above; and
  3. All UCBs having asset size of ₹500 crore and above1.

4. The Supervised Entities as indicated in Para 3 above shall implement the RBIA framework by March 31, 2022 in accordance with the Guidelines on Risk-Based Internal Audit provided in the enclosed Annex. The Guidelines are intended to enhance the efficacy of internal audit systems and processes followed by the NBFCs and UCBs.

5. Further, in order to ensure smooth transition from the existing system of internal audit to RBIA, the concerned NBFCs and UCBs may constitute a committee of senior executives with the responsibility of formulating a suitable action plan. The committee may address transitional and change management issues and should report progress periodically to the Board and senior management.

6. This circular should be placed before the Board in its next meeting. The implementation of these guidelines as per timeline specified should be done under the oversight of the Board.


Ref. No.DoS.CO.PPG./SEC.05 /11.01.005/2020-21 dated February 03, 2021

Guidelines on Risk-Based Internal Audit (RBIA) System for Select NBFCs and UCBs

RBI vide circular DBS.CO.PP.BC.10/11.01.005/2002-03 dated December 27, 2002, had introduced Risk-Based Internal Audit (RBIA) system in Scheduled Commercial Banks (SCBs) as part of their internal control framework, which was further supplemented vide circular DoS.CO.PPG./SEC.04/11.01.005/2020-21 dated January 07, 2021. This framework relies broadly on a well-defined policy for internal audit, functional independence with sufficient standing, effective channels of communication and adequate audit resources with sufficient professional competence.

While NBFCs (Non-Banking Financial Companies) and Primary (Urban) Cooperative Banks (UCBs) have grown in size and become systemically important, prevalence of different audit system/approaches in such entities has created certain inconsistencies, risks and gaps. As SCBs, NBFCs and UCBs face similar risks by virtue of being engaged in similar financial intermediation activities, their internal audit systems also need to broadly align while keeping in mind the principle of proportionality. Considering these aspects, the Guidelines herein prescribe the broad principles that should be followed by NBFCs and UCBs to enable them to gradually move towards an RBIA system.

A. Objectives and Scope

1. An effective Risk-Based Internal Audit (RBIA) is an audit methodology that links an organisation’s overall risk management framework and provides an assurance to the Board of Directors and the Senior Management on the quality and effectiveness of the organisation’s internal controls, risk management and governance related systems and processes.

2. The internal audit function should broadly assess and contribute to the overall improvement of the organization’s governance, risk management, and control processes using a systematic and disciplined approach. The function is an integral part of sound corporate governance and is considered as the third line of defence.

3. Historically, the internal audit system in NBFCs/UCBs has generally been concentrating on transaction testing, testing of accuracy and reliability of accounting records and financial reports, adherence to legal and regulatory requirements, etc. However, in the changing scenario, such testing by itself might not be sufficient. Therefore, SEs will have to move towards a framework which will include, in addition to selective transaction testing, an evaluation of the risk management systems and control procedures in various areas of operations. This will also help in anticipating areas of potential risks and mitigating such risks.

4. While the Risk Management Function should focus on identification, measurement, monitoring, and management of risks, development of risk policies and procedures, use of risk management models, etc., RBIA should undertake an independent risk assessment for the purpose of formulating a risk-based audit plan which considers the inherent business risks emanating from an activity / location and the effectiveness of the control systems for monitoring such inherent risks.

Expectations on the roles and responsibilities of different functionaries for this internal audit framework are provided in the following paragraphs.

B. Board of Directors / Audit Committee of Board

1. The Board of Directors (the Board) / Audit Committee of Board (ACB) of NBFCs and the Board of UCBs are primarily responsible for overseeing the internal audit function in the organization. The RBIA policy shall be formulated with the approval of the Board and disseminated widely within the organization. The policy shall clearly document the purpose, authority, and responsibility of the internal audit activity, with a clear demarcation of the role and expectations from Risk Management Function and Risk Based Internal Audit Function. The policy should be consistent with the size and nature of the business undertaken, the complexity of operations and should factor in the key attributes of internal audit function relating to independence, objectivity, professional ethics, accountability, etc. The RBIA policy must be reviewed periodically.

2. The internal audit function shall be carried out effectively so as to ensure that it adds value to the organization. For the purpose, the ACB/Board shall approve a RBIA plan to determine the priorities of the internal audit function based on the level and direction of risk, as consistent with the entity’s goals. The risk assessment of business and other functions of the organization shall at the minimum be conducted on an annual basis. Every activity / location, including the risk management and compliance functions, shall be subjected to risk assessment by the RBIA. The policy should also lay down the maximum time period beyond which even the low risk business activities / locations would not remain excluded for audit.

3. The ACB/Board is expected to review the performance of RBIA. The ACB/Board should formulate and maintain a quality assurance and improvement program that covers all aspects of the internal audit function. The quality assurance program may include assessment of the internal audit function at least once in a year for adherence to the internal audit policy, objectives and expected outcomes. Further, ACB/Board shall promote the use of new audit tools/ new technologies for reducing the extent of manual monitoring / transaction testing / compliance monitoring, etc.

C. Senior Management

1. The senior management is responsible for ensuring adherence to the internal audit policy guidelines as approved by the Board and development of an effective internal control function that identifies, measures, monitors and reports all risks faced. It shall ensure that appropriate action is taken on the internal audit findings within given timelines and status on closure of audit reports is placed before the ACB/Board.

2. The senior management is responsible for establishing a comprehensive and independent internal audit function which should promote accountability and transparency. It shall ensure that the RBIA Function is adequately staffed with skilled personnel of right aptitude and attitude who are periodically trained to update their knowledge, skill and competencies.

3. A consolidated position of major risks faced by the organization shall be presented at least annually to the ACB/Board, based on inputs from all forms of audit.

D. Internal Audit Function

The internal audit function should assess and make appropriate recommendations to improve the governance processes on business decision making, risk management and control; promote appropriate ethics and values within the organization; and ensure effective performance management and staff accountability, etc.

The following key-attributes need to be observed:

I. Authority, Stature, Independence and Resources

The internal audit function must have sufficient authority, stature, independence and resources thereby enabling internal auditors to carry out their assignments properly. The Head of Internal Audit (HIA) shall be a senior executive with the ability to exercise independent judgement. The HIA and the internal audit functionaries shall have the authority to communicate with any staff member and get access to all records that are necessary to carry out the entrusted responsibilities.

II. Competence

Requisite professional competence, knowledge and experience of each internal auditor is essential for the effectiveness of internal audit function. The areas of knowledge and experience may include banking/financial entity’s operations, accounting, information technology, data analytics, forensic investigation, among others. The collective skill levels should be adequate to audit all areas of the SE.

III. Rotation of Staff

Except for the entities where the internal audit function is a specialised function and managed by career internal auditors, the Board should prescribe a minimum period of service for staff in the internal audit function. The Board may also examine the feasibility of prescribing at least one stint of service in the internal audit function for those staff possessing specialized knowledge useful for the audit function, but who are posted in other areas, so as to have adequate skills for the staff in the internal audit function.

IV. Tenor for appointment of Head of Internal Audit

Except for the entities where the internal audit function is a specialised function and managed by career internal auditors, the HIA shall be appointed for a reasonably long period, preferably for a minimum of three years.

V. Reporting Line

The HIA shall directly report to either the ACB/Board/ MD & CEO or to the Whole Time Director (WTD). Should the Board of Directors decide to allow the MD & CEO or a WTD to be the ‘Reporting authority’, then the ‘Reviewing authority’ shall be the ACB/Board and the ‘Accepting authority’ shall be the Board in matters of performance appraisal of the HIA. Further, in such cases, the ACB/Board shall meet the HIA at least once in a quarter, without the presence of the senior management (including the MD & CEO/WTD). The HIA shall not have any reporting relationship with the business verticals of these SEs and shall not be given any business targets.

VI. Remuneration

The independence and objectivity of the internal audit function could be undermined if the remuneration of internal audit staff is linked to the financial performance of the business lines for which they exercise audit responsibilities. Thus, the remuneration policies should be structured in a way to avoid creating conflict of interest and compromising audit’s independence and objectivity.

VII. Responsibilities and Other General Expectations

1. The internal audit function should work on the basis of established policies and procedures as approved by the ACB/Board.

2. The internal audit shall undertake an independent risk assessment for the purpose of formulating a risk-based audit plan. This risk assessment would cover risks at various levels/areas (corporate and branch, the portfolio and individual transactions, etc.) as also the associated processes.

3. The risk assessment in the internal audit department should be used for focusing on the material risk areas and prioritizing the audit work.

4. The risk assessment process should, inter alia, include identification of inherent business risks in various activities undertaken, evaluation of the effectiveness of the control systems for monitoring the inherent risks of the business activities (‘Control risk’) and drawing-up a risk-matrix for both the factors viz., inherent business risks and control risks.

5. The basis for determination of the level (high, medium, low) and trend (increasing, stable, decreasing) of inherent business risks and control risks should be clearly spelt out.

6. The risk assessment may make use of both quantitative and qualitative approaches. While the quantum of credit, market, and operational risks could largely be determined by quantitative assessment, the qualitative approach may be adopted for assessing the quality of overall governance and controls in various business activities.

7. The risk assessment methodology should include, inter alia, parameters such as (a) Previous internal audit reports and compliance; (b) Proposed changes in business lines or change in focus; (c) Significant change in management / key personnel; (d) Results of regulatory examination report; (e) Reports of external auditors; (f) Industry trends and other environmental factors; (g) Time elapsed since last audit; (h) Volume of business and complexity of activities; (i) Substantial performance variations from the budget; and (j) Business strategy of the entity vis-à-vis the risk appetite and adequacy of control.

8. For the risk assessment to be accurate, it will be necessary to have proper MIS and data integrity arrangements. The internal audit function should be kept informed of all developments such as introduction of new products, changes in reporting lines, changes in accounting practices / policies, etc. The risk assessment should invariably be undertaken on a yearly basis. The assessment should also be periodically updated to take into account changes in business environment, activities and work processes, etc.

9. Before taking up specific internal audit assignment, the plan, scope, objectives, timelines and resource allocations of the assignment should be clearly established. The scope and objectives of the assignment should be based on a preliminary assessment of the risks relevant to the business activity under review.

10. The SEs may prepare a Risk Audit Matrix based on the magnitude and frequency of risk. The Audit Plan should prioritize audit work to give greater attention to the areas of:

  1. High magnitude and high frequency
  2. High magnitude and medium frequency
  3. High magnitude and low frequency
  4. Medium magnitude and high frequency
  5. Medium magnitude and medium frequency
  6. Low magnitude and high frequency.

11. The scope of the audit and resource allocation should be sufficient to achieve the objectives of the audit assignment. The precise scope of RBIA must be determined by each SE for low, medium, high, very high and extremely high risk areas. The scope of internal audit should also include system and process audits in respect of all critical processes. The findings of such audits should also be placed before the IT Committee of the Board.

12. The internal audit report should be based on appropriate analysis and evaluation. It should bring out adequate, reliable, relevant and useful information to support the observations and conclusions. It should cover the objectives, scope, and results of the audit assignment and make appropriate recommendations and / or action plans.

13. All the pending high and medium risk paras and persisting irregularities should be reported to the ACB/Board in order to highlight key areas in which risk mitigation has not been undertaken despite risk identification.

14. The internal audit function should have a system to monitor compliance to the observations made by internal audit. Status of compliance should be an integral part of reporting to the ACB/Board.

15. The internal audit function shall not be outsourced. However, where required, experts including former employees can be hired on a contractual basis subject to the ACB/Board being assured that such expertise does not exist within the audit function of the SE. Any conflict of interest in such matters shall be recognised and effectively addressed. Ownership of audit reports in all cases shall rest with regular functionaries of the internal audit function.

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unauthorised digital lending platforms


There have been reports about individuals/small businesses falling prey to growing number of unauthorised digital lending platforms/Mobile Apps on promises of getting loans in quick and hassle-free manner. These reports also refer to excessive rates of interest and additional hidden charges being demanded from borrowers; adoption of unacceptable and high-handed recovery methods; and misuse of agreements to access data on the mobile phones of the borrowers.

Legitimate public lending activities can be undertaken by Banks, Non-Banking Financial Companies (NBFCs) registered with RBI and other entities who are regulated by the State Governments under statutory provisions, such as the money lending acts of the concerned states. Members of public are hereby cautioned not to fall prey to such unscrupulous activities and verify the antecedents of the company/ firm offering loans online or through mobile apps. Moreover, consumers should never share copies of KYC documents with unidentified persons, unverified/unauthorised Apps and should report such Apps/Bank Account information associated with the Apps to concerned law enforcement agencies or use Sachet portal (https://sachet.rbi.org.in) to file an on-line complaint.

Reserve Bank has also mandated that digital lending platforms which are used on behalf of Banks and NBFCs should disclose name of the Bank(s) or NBFC(s) upfront to the customers. The names and addresses of the NBFCs registered with the Reserve Bank can be accessed here and the portal for filing complaints against the entities regulated by the RBI can be accessed through https://cms.rbi.org.in.

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co-lending by banks and NBFCs to priority sector

Co-Lending by Banks and NBFCs to Priority Sector

Please refer to the circular FIDD.CO.Plan.BC.08/04.09.01/2018-19 dated September 21, 2018 on co-origination of loans by banks and NBFCs for lending to priority sector. The arrangement entailed joint contribution of credit at the facility level by both the lenders as also sharing of risks and rewards.

2. Based on the feedback received from the stakeholders and to better leverage the respective comparative advantages of the banks and NBFCs in a collaborative effort, it has been decided to provide greater operational flexibility to the lending institutions, while requiring them to conform to the regulatory guidelines on outsourcing, KYC, etc. The primary focus of the revised scheme, rechristened as “Co-Lending Model” (CLM), is to improve the flow of credit to the unserved and underserved sector of the economy and make available funds to the ultimate beneficiary at an affordable cost, considering the lower cost of funds from banks and greater reach of the NBFCs. Detailed features of the CLM are furnished in the Annex.

3. In terms of the CLM, banks are permitted to co-lend with all registered NBFCs (including HFCs) based on a prior agreement. The co-lending banks will take their share of the individual loans on a back-to-back basis in their books. However, NBFCs shall be required to retain a minimum of 20 per cent share of the individual loans on their books.

4. The banks and NBFCs shall formulate Board approved policies for entering into the CLM and place the approved policies on their websites. Based on their Board approved policies, a Master Agreement may be entered into between the two partner institutions which shall inter-alia include, terms and conditions of the arrangement, the criteria for selection of partner institutions, the specific product lines and areas of operation, along with provisions related to segregation of responsibilities as well as customer interface and protection issues, as detailed in the Annex.

5. The Master Agreement may provide for the banks to either mandatorily take their share of the individual loans originated by the NBFCs in their books as per the terms of the agreement, or to retain the discretion to reject certain loans after their due diligence prior to taking in their books, subject to the conditions specified in the Annex.

6. The banks can claim priority sector status in respect of their share of credit while engaging in the CLM adhering to the specified conditions.

7. The CLM shall not be applicable to foreign banks (including WOS) with less than 20 branches.

8. This circular supersedes the circular FIDD.CO.Plan.BC.08/04.09.01/2018-19 dated September 21, 2018. However, outstanding loans in terms of the circular ibid would continue to be classified under priority sector till their repayment or maturity, whichever is earlier.


Essential Features of Co-Lending Model between Banks and NBFCs

I. Scope

1. The Master Agreement entered into by the banks and NBFCs for implementing the CLM may provide either for the bank to mandatorily take their share of the individual loans as originated by the NBFC in their books or retain the discretion to reject certain loans subject to its due diligence.

  1. If the Agreement entails a prior, irrevocable commitment on the part of the bank to take into its books its share of the individual loans as originated by the NBFC, the arrangement must comply with the extant guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by Banks issued vide RBI/2014-15/497/DBR.No.BP.BC.76/21.04.158/2014-15 dated March 11, 2015 and updated from time to time. In particular, the partner bank and NBFC shall have to put in place suitable mechanisms for ex-ante due diligence by the bank as the credit sanction process cannot be outsourced under the extant guidelines.
  2. The bank shall also be required to comply with the Master Directions – Know Your Customer (KYC) Direction, 2016, issued vide RBI/DBR/2015-16/18 Master Direction DBR.AML.BC.No.81/14.01.001/2015-16 dated February 25, 2016 and updated from time to time, which already permit regulated entities, at their option, to rely on customer due diligence done by a third party, subject to specified conditions.
  3. However, if the bank can exercise its discretion regarding taking into its books the loans originated by NBFC as per the Agreement, the arrangement will be akin to a direct assignment transaction. Accordingly, the taking over bank shall ensure compliance with all the requirements in terms of Guidelines on Transactions Involving Transfer of Assets through Direct Assignment of Cash Flows and the Underlying Securities issued vide RBI/2011-12/540 DBOD.No.BP.BC-103/21.04.177/2011-12 dated May 07, 2012 and RBI//2012-13/170 DNBS. PD. No. 301/3.10.01/2012-13 August 21, 2012 respectively, as updated from time to time, with the exception of Minimum Holding Period (MHP) which shall not be applicable in such transactions undertaken in terms of this CLM.
  4. The MHP exemption shall be available only in cases where the prior agreement between the banks and NBFCs contains a back-to-back basis clause and complies with all other conditions stipulated in the guidelines for direct assignment.

2. Banks shall not be allowed to enter into co-lending arrangement with an NBFC belonging to the promoter Group.

II. Customer related issues

3. The NBFC shall be the single point of interface for the customers and shall enter into a loan agreement with the borrower, which shall clearly contain the features of the arrangement and the roles and responsibilities of NBFCs and banks.

4. All the details of the arrangement shall be disclosed to the customers upfront and their explicit consent shall be taken.

5. The ultimate borrower may be charged an all-inclusive interest rate as may be agreed upon by both the lenders conforming to the extant guidelines applicable to both.

6. The extant guidelines relating to customer service and fair practices code and the obligations enjoined upon the banks and NBFCs therein shall be applicable mutatis mutandis in respect of loans given under the arrangement.

7. The NBFC should be able to generate a single unified statement of the customer, through appropriate information sharing arrangements with the bank.

8. With regard to grievance redressal, suitable arrangement must be put in place by the co-lenders to resolve any complaint registered by a borrower with the NBFC within 30 days, failing which the borrower would have the option to escalate the same with the concerned Banking Ombudsman/Ombudsman for NBFCs or the Customer Education and Protection Cell (CEPC) in RBI.

III. Other Operational Aspects

9. The co-lending banks and NBFCs shall maintain each individual borrower’s account for their respective exposures. However, all transactions (disbursements/ repayments) between the banks and NBFCs relating to CLM shall be routed through an escrow account maintained with the banks, in order to avoid inter-mingling of funds. The Master Agreement shall clearly specify the manner of appropriation between the co-lenders.

10. The Master Agreement may contain necessary clauses on representations and warranties which the originating NBFC shall be liable for in respect of the share of the loans taken into its books by the bank.

11. The co-lenders shall establish a framework for monitoring and recovery of the loan, as mutually agreed upon.

12. The co-lenders shall arrange for creation of security and charge as per mutually agreeable terms.

13. Each lender shall adhere to the asset classification and provisioning requirement, as per the respective regulatory guidelines applicable to each of them including reporting to Credit Information Companies, under the applicable regulations for its share of the loan account.

14. The loans under the CLM shall be included in the scope of internal/statutory audit within the banks and NBFCs to ensure adherence to their respective internal guidelines, terms of the agreement and extant regulatory requirements.

15. Any assignment of a loan by a co-lender to a third party can be done only with the consent of the other lender.

16. Both the banks and the NBFCs shall implement a business continuity plan to ensure uninterrupted service to their borrowers till repayment of the loans under the co-lending agreement, in the event of termination of co-lending arrangement between the co-lenders.

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co-origination model

RBI press release dated 8th October, 2020 giving their statement on developmental and regulatory policies.

Review of the Co-origination Model
The Reserve Bank had, in 2018, put in place a framework for co-origination of loans by banks and a category of Non Banking Financial Companies (NBFCs) for lending to the priority sector subject to certain conditions. The arrangement entailed joint contribution of credit at the facility level, by both the lenders as also sharing of risks and rewards between them for ensuring appropriate alignment of respective business objectives. Based on the feedback received from the stakeholders, to better leverage the respective comparative advantages of the banks and NBFCs in a
collaborative effort, and to improve the flow of credit to the unserved and
underserved sector of the economy, it has been decided to extend the scheme to all the NBFCs (including HFCs), to make all priority sector loans eligible for the scheme and give greater operational flexibility to the lending institutions, while requiring them to conform to the regulatory guidelines on outsourcing, KYC, etc. The proposed framework will be called as “Co-Lending Model”. The revised guidelines will be issued by end of October 2020.

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core investment companies

RBI has vide its circular dated 13th August, 2020 reviewed its guidelines on core investment companies. The salient features of the guidelines are as under:

2. Definition of Adjusted Net worth (ANW)

2.1 Reference is drawn to para 3 (i) of the Master Direction on Core Investment Companies (Reserve Bank) Directions, 2016. While computing Adjusted Net Worth (ANW), the amount representing any direct or indirect capital contribution made by one CIC in another CIC, to the extent such amount exceeds ten per cent of Owned Funds of the investing CIC, shall be deducted. All other terms and conditions for computation of ANW remain the same.

2.2 The deduction requirement shall take immediate effect for any investment made by a CIC in another CIC after date of issue of this circular. In cases where the investment by a CIC in another CIC is already in excess of 10 percent as on the date of this circular, the CIC need not deduct the excess investment as on the date of this circular from owned funds for computation of its ANW till March 31, 2023.

3. Group Structure

3.1 To address the complexity in group structures and existence of multiple CICs within a group, it has been decided that the number of layers of CICs within a Group (including the parent CIC) shall be restricted to two, irrespective of the extent of direct or indirect holding/ control exercised by a CIC in the other CIC. If a CIC makes any direct/ indirect equity investment in another CIC, it will be deemed as a layer for the investing CIC.  While the regulation shall be applicable from the date of the circular, existing entities shall reorganise their business structure and adhere to this guideline latest by March 31 2023.

4. Risk Management

4.1 The parent CIC in the group or the CIC with the largest asset size, in case there is no identifiable parent CIC in the group, shall constitute a Group Risk Management Committee (GRMC). The GRMC shall report to the Board of the CIC that constitutes it and shall meet at least once in a quarter. The composition of GRMC shall be as under:

  1. The GRMC shall comprise minimum of five members, including executive members.
  2. At least two members shall be independent directors, one of whom shall be the Chairperson of the GRMC.
  3. Members shall have adequate and commensurate experience in risk management practices.

4.2 The GRMC will have the following responsibilities:

  1. Analyse the material risks to which the group, its businesses and subsidiaries are exposed.  It must discuss all risk strategies both at an aggregated level and by type of risk and make recommendations to the Board in accordance with the group’s overall risk appetite.
  2. Identify potential intra-group conflicts of interest.
  3. Assess whether there are effective systems in place to facilitate exchange of information for effective risk oversight of the group.
  4. Assess whether the corporate governance framework addresses risk management across the group.
  5. Carry out periodic independent formal review of the group structure and internal controls.
  6. Articulate the leverage of the Group and monitor the same.

4.3 Based on the analyses and recommendations of the GRMC, CICs shall initiate corrective action, where necessary. Chief Risk Officers (CROs), appointed in CICs as per Para 4.4 below, shall initiate such corrective action.

4.4 All CICs with asset size of more than ₹5,000 crore shall appoint a CRO with clearly specified roles and responsibilities. Guidelines on CRO shall be as per Para 71 on Appointment of Chief Risk Officer of Master Direction – Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.

4.5 CICs shall submit to the Board, a quarterly statement of deviation certified by the Chief Executive Officer/ Chief Financial Officer, indicating deviations  in the use of proceeds of any funding obtained by the CIC from creditors and investors from the objects/ purpose stated in the application, sanction letter or offer document for such funding.

5. Corporate Governance and Disclosure Requirements

5.1 Corporate governance requirements will be as per the Companies Act, 2013. Disclosure requirements will be applicable to NBFC-CICs as per the guidelines contained at Annex of this circular. The guidelines indicate basic minimum requirements and CICs shall strive to achieve higher standards of governance and disclosure.

5.2 CICs shall ensure that a policy is put in place with the approval of the Board for ascertaining the ‘fit and proper’ status of directors not only at the time of appointment, but also on a continuous basis. Guidelines as applicable to NBFCs as per Para 72 on Fit and Proper Criteria of Master Direction – Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 as updated from time to time, shall be applicable also to CICs.

6. Consolidation of Financial Statement (CFS)

6.1 CICs shall prepare CFS as per provisions of Companies Act, 2013, so as to provide a clear view of the financials of the group as a whole. However, it is possible that entities that meet the definition of group as per extant regulations are not covered under consolidation due to exemptions granted as per statutory provisions/ applicable accounting standards. For such entities which are not included in the consolidation, disclosures shall be made in the indicative format mentioned at paragraph 2 of the Annex. In the process of consolidation, the auditor of a CIC, as the ‘principal auditor’, shall use the work of other auditors with respect to the financial information of other respective entities, subject to auditing standards as also guidance notes issued by the Institute of Chartered Accountants of India1 from time to time.

7. Exceptions to carrying other financial activity

Reference is drawn to para 2(1)(iv) of the Master Direction on Core Investment Company (Reserve Bank) Directions, 2016 on  other financial activities that can be undertaken by the CIC. CICs are allowed to invest in money market instruments, including mutual funds which make investments in money market instruments/debt instruments with a maturity of up to 1 year.

8. Registration

8.1 Reference is drawn to Para 7 of Master Direction on Core Investment Companies (Reserve Bank) Directions, 2016. It shall be noted that CICs (a) with an asset size of less than ₹100 crore, irrespective of whether accessing public funds or not and (b) with an asset size of ₹100 crore and above and not accessing public funds are not required to register with the Bank under Section 45IA of the RBI Act, 1934 in terms of notification No. DNBS.PD.221/CGM (US) 2011 dated January 5, 2011.

9. Change in nomenclature

9.1 A Systemically Important Core Investment Company, as defined in sub-paragraph (xxv) of paragraph 3 of the Core Investment Companies (Reserve Bank) Directions, 2016 will henceforth be termed as a Core Investment Company. A Core Investment Company, which is not required to be registered in terms of para 8.1 above, will henceforth be termed as ‘Unregistered CIC’ instead of ‘exempted CIC’.

10. Others

10.1 CICs implementing Indian Accounting Standards shall adhere to the circular DOR (NBFC).CC.PD No.109/22.10.106/2019-20 dated March 13, 2020 on Implementation of Indian Accounting Standards.

10.2 All CICs shall adhere to the guidelines on Submission of Data to Credit Information Companies as per para 100 and 101 of Master Direction Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.

RBI circular is available at this link https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11949&Mode=0

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NBFC – audit of accounts

RBI has vide its circular dated 6th July, 2020 extended the timeline for finalisation of accounts of listed systemically important non deposit taking and deposit taking companies by such period as is allowed by SEBI. 

Hitherto, the time allowed for finalisation of accounts of systemically important deposit taking and non deposit taking companies is 3 months from the financial period closure i.e. by 30th June, in case the fianncial year closes on 31st March. But with this circular RBI has given relief only to listed such entities as they are also governed by SEBI regulations. 
Copy of the RBI circular can be found here i.e.

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Indian accounting standards

RBI circular dated 13th March, 2020 addressed to NBFCs and ARCs.

Implementation of Indian Accounting Standards

Non-Banking Financial Companies (NBFCs) covered by Rule 4 of the Companies (Indian Accounting Standards) Rules, 2015 are required to comply with Indian Accounting Standards (Ind AS) for the preparation of their financial statements. In order to promote a high quality and consistent implementation as well as facilitate comparison and better supervision, the Reserve Bank has framed regulatory guidance on Ind AS given in the Annex which will be applicable on Ind AS implementing NBFCs and Asset Reconstruction Companies (ARCs) for preparation of their financial statements from financial year 2019-20 onwards.

2. The annexed instructions and guidelines relate to specific prudential aspects of Ind AS implementation by NBFCs/ARCs and are not meant to provide a comprehensive commentary on the accounting standards or comprehensive technical interpretation of the standards, nor intended to cover all possible situations. Accordingly, with respect to matters not dealt with in the Annex, NBFCs/ARCs are required to refer to the notified accounting standards, application guidance, educational material and other clarifications issued by the Institute of Chartered Accountants of India (ICAI).


Implementation of Indian Accounting Standards by
Non-Banking Financial Companies and Asset Reconstruction Companies1

The responsibility of preparing and ensuring fair presentation of the financial statements of a Non-Banking Financial Company (NBFC) / Asset Reconstruction Company (ARC) vests primarily with its Board of Directors. The Reserve Bank, expects a high quality implementation of Ind AS which will require detailed analysis, application of judgment and detailed documentation to support judgments. These guidelines focus on the need to ensure consistency in the application of the accounting standards in specific areas, including asset classification and provisioning, and provide clarifications on regulatory capital in the light of Ind AS implementation.

1. Governance Framework

  1. In view of the criticality of the nature of the business model in determining the classification of financial assets and restrictions on subsequent reclassification, NBFCs/ARCs are advised to put in place Board approved policies that clearly articulate and document their business models and portfolios. NBFCs/ARCs shall also articulate the objectives for managing each portfolio.
  2. NBFCs/ARCs shall frame their policy for sales out of amortised cost business model portfolios and disclose the same in their notes to financial statements.
  3. The Reserve Bank expects the Board of Directors to approve sound methodologies2 for computation of Expected Credit Losses(ECL) that address policies, procedures and controls for assessing and measuring credit risk on all lending exposures, commensurate with the size, complexity and risk profile specific to the NBFC/ARC. The parameters and assumptions considered as well as their sensitivity to the ECL output should be documented. NBFCs/ARCs are advised to not make changes in the parameters, assumptions and other aspects of their ECL model for the purposes of profit smoothening. The rationale and justification for any change in the ECL model should be documented and approved by the Board. Similarly, any adjustments to the model output (i.e. a management overlay) should be approved by the Audit Committee of the Board (ACB) and its rationale and basis should be clearly documented.
  4. Ind AS 109 does not explicitly define default3, but requires entities to define default in a manner consistent with that used for internal credit risk management. It is recommended that the definition of default adopted for accounting purposes is guided by the definition used for regulatory purposes. The ACB should approve the classification of accounts that are past due beyond 90 days but not treated as impaired, with the rationale for the same clearly documented. Further, the number of such accounts and the total amount outstanding and the overdue amounts should be disclosed in the notes to the financial statements.
  5. Regardless of the way in which NBFC/ARC assesses significant increase in credit risk, there is a rebuttable presumption under Ind AS 109 that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due. Ind AS 109 also permits that an NBFC/ARC can rebut this presumption if it has reasonable and supportable information that demonstrates that the credit risk has not increased significantly since initial recognition even though the contractual payments are more than 30 days past due. NBFCs/ARCs should educate their customers on the need to make payments in a timely manner. However, in limited circumstances, where NBFCs/ARCs do rebut the presumption, it should be done only with clear documentation of the justification for doing so. All such cases shall be placed before the ACB. NBFCs/ARCs shall not defer the recognition of significant increase in credit risk for any exposure that is overdue beyond 60 days.

2. Prudential Floor for ECL

  1. NBFCs/ ARCs shall hold impairment allowances as required by Ind AS. In parallel NBFCs/ARCs shall also maintain the asset classification and compute provisions as per extant prudential norms on Income Recognition, Asset Classification and Provisioning (IRACP) including borrower/beneficiary wise classification, provisioning for standard as well as restructured assets, NPA ageing, etc. A comparison (as per the template in Appendix) between provisions required under IRACP and impairment allowances made under Ind AS 109 should be disclosed by NBFCs/ARCs in the notes to their financial statements to provide a benchmark to their Boards, RBI supervisors and other stakeholders, on the adequacy of provisioning for credit losses.
  2. Where impairment allowance under Ind AS 109 is lower than the provisioning required under IRACP (including standard asset provisioning), NBFCs/ARCs shall appropriate the difference from their net profit or loss after tax to a separate ‘Impairment Reserve’. The balance in the ‘Impairment Reserve’ shall not be reckoned for regulatory capital. Further, no withdrawals shall be permitted from this reserve without prior permission from the Department of Supervision, RBI.
  3. The requirement for ‘Impairment Reserve’ shall be reviewed, going forward.

3. Computation of Regulatory Capital and Regulatory Ratios

(a) In determining ‘owned funds’, ‘net owned funds’ and ‘regulatory capital’, NBFCs and ARCs shall be guided by the following:

i) Any net unrealised gains arising on fair valuation of financial instruments, including such gains arising on transition to Ind AS, should not be included in owned funds whereas all such net losses should be considered. In determining the net unrealised gains for reduction from owned funds, NBFCs should categorise financial assets measured at fair value into two categories viz.

  1. Investments in shares of other NBFCs and in shares, debentures, bonds, etc. in Group companies that are required to be reduced while determining Tier I Capital as defined in paragraph 2(xxxii) of the Non-Banking Financial Company-Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016; and
  2. Others

While netting may be done within the aforementioned categories, net gains from one category should not be offset against losses in the other category.

ii) Any unrealised gains or losses recognised in equity due to (a) own credit risk and (b) cash flow hedge reserve shall be derecognised while determining owned funds.

iii) Since unrealised gains on category A have been excluded in computation of owned fund, NBFCs shall reduce the lower of acquisition cost or fair value of investments/advances in subsidiaries/other group companies and other NBFCs while determining Tier I capital as specified in paragraph 2(xxxii) of the aforementioned Master Directions. Net unrealised gains on Category B (i.e. ‘Others’) to the extent they have been excluded in regulatory capital, shall also be reduced from risk weighted assets.

iv) ARCs shall apply the guidelines specified in sub-paragraph (i) to (iii) above mutatis mutandis while determining net owned funds.

v) Where NBFCs/ARCs use fair value as deemed cost at the date of transition with respect to Property, Plant and Equipment (PPE) in terms of Ind AS 101, and the difference between the deemed cost and the current carrying cost is adjusted directly in retained earnings, any fair value gains upon such transition shall be reckoned as Tier II capital for NBFCs/ net owned funds for ARCs at a discount of 55 percent.

vi) 12 month expected credit loss (ECL) allowances for financial instruments i.e. where the credit risk has not increased significantly since initial recognition, shall be included under general provisions and loss reserves in Tier II capital within the limits specified by extant regulations. Lifetime ECL shall not be reckoned for regulatory capital (numerator) while it shall be reduced from the risk weighted assets.

vii) Securitised assets not qualifying for de-recognition under Ind AS due to credit enhancement given by the originating NBFC on such assets shall be risk weighted at zero percent. However, the NBFC shall reduce 50 per cent of the amount of credit enhancement given from Tier I capital and the balance from Tier II capital.

(b) Regulatory ratios, limits and disclosures shall be based on Ind AS figures. Impaired assets and restructured assets shall be considered as non-performing assets (NPA) for calculation of NPA ratios.

1NBFCs/ARCs that are required to implement Ind AS in terms of Companies (Indian Accounting Standards) Rules, 2015 as amended from time to time

2NBFCs/ARCs may draw reference to Guidance on Credit Risk and Accounting for Expected Credit Losses issued by Basel Committee on Banking Supervision (BCBS) in December 2015, which is structured around 11 principles out of which first eight principles deal with supervisory guidance and inter-alia cover Board/Senior Management’s responsibilities, adoption of sound methodologies for credit risk measurement, disclosure requirements etc.

3Para B5.5.37 of Ind AS 109 states that “…an entity shall apply a default definition that is consistent with the definition used for internal credit risk management purposes for the relevant financial instrument and consider qualitative indicators (for example, financial covenants) when appropriate. However, there is a rebuttable presumption that default does not occur later than when a financial asset is 90 days past due unless an entity has reasonable and supportable information to demonstrate that a more lagging default criterion is more appropriate. The definition of default used for these purposes shall be applied consistently to all financial instruments unless information becomes available that demonstrates that another default definition is more appropriate for a particular financial instrument.”



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External Commercial Borrowings

Gist of RBI circular dated 30th July, 2019 on the subject.

Attention of Authorized Dealer Category-I (AD Category-I) banks is invited to paragraphs 2.1.(v) and 2.1.(viii) of Master Direction No.5 dated March 26, 2019 on the above subject in terms of which, inter alia, ECB proceeds cannot be utilised for working capital purposes, general corporate purposes and repayment of Rupee loans except when the ECB is availed from foreign equity holder for a minimum average maturity period of 5 years. Further, on-lending for these activities out of ECB proceeds is also prohibited.

2. Based on the feedback from stakeholders and with a view to further liberalise the ECB framework, it has been decided, in consultation with the Government of India, to relax the end-use restrictions. Accordingly, eligible borrowers will now be permitted to raise ECBs for the following purposes from recognised lenders, except foreign branches/ overseas subsidiaries of Indian banks, subject to paragraph 2.2 of the direction ibid:

  1. ECBs with a minimum average maturity period of 10 years for working capital purposes and general corporate purposes. Borrowing by NBFCs for the above maturity for on lending for the above purposes is also permitted.
  2. ECBs with a minimum average maturity period of 7 years can be availed by eligible borrowers for repayment of Rupee loans availed domestically for capital expenditure as also by NBFCs for on-lending for the same purpose. For repayment of Rupee loans availed domestically for purposes other than capital expenditure and for on-lending by NBFCs for the same, the minimum average maturity period of the ECB is required to be 10 years.
  3. It has been decided to permit eligible corporate borrowers to avail ECB for repayment of Rupee loans availed domestically for capital expenditure in manufacturing and infrastructure sector if classified as SMA-2 or NPA, under any one time settlement with lenders. Lender banks are also permitted to sell, through assignment, such loans to eligible ECB lenders, except foreign branches/ overseas subsidiaries of Indian banks, provided, the resultant external commercial borrowing complies with all-in-cost, minimum average maturity period and other relevant norms of the ECB framework.

3. The prescribed minimum average maturity provision, as above, for the aforesaid end-uses will have to be strictly complied with under all circumstances.

4. All other provisions of the ECB policy remain unchanged. AD Category – I banks should bring the contents of this circular to the notice of their constituents and customers.

5. The Master Direction No. 5 dated March 26, 2019 is being updated to reflect the above changes.

6. The directions contained in this circular have been issued under section 10(4) and 11(2) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.

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Prior approval of RBI for acquisition/ transfer of control of NBFCs

RBI has vide its circular dated 9th July, 2015 mandated that prior written permission of RBI will be required for 

  1. any takeover or acquisition of control of an NBFC, which may or may not result in change of management;
  2. any change in the shareholding of an NBFC, including progressive increases over time, which would result in acquisition/ transfer of shareholding of 26 per cent or more of the paid up equity capital of the NBFC. Prior approval would, however, not be required in case of any shareholding going beyond 26% due to buyback of shares/ reduction in capital where it has approval of a competent Court. The same is however required to be reported to the Reserve Bank not later than one month from its occurrence;
  3. any change in the management of the NBFC which would result in change in more than 30 per cent of the directors, excluding independent directors. Prior approval would not be required for those directors who get re-elected on retirement by rotation.

RBI has further clarified the procedure regarding making application for prior permission as follows:

(i) NBFCs shall submit an application, in the company letter head, for obtaining prior approval of the Bank under paragraph 2, along with the following documents:

  1. Information about the proposed directors/ shareholders as per the Annex;
  2. Sources of funds of the proposed shareholders acquiring the shares in the NBFC;
  3. Declaration by the proposed directors/ shareholders that they are not associated with any unincorporated body that is accepting deposits;
  4. Declaration by the proposed directors/ shareholders that they are not associated with any company, the application for Certificate of Registration (CoR) of which has been rejected by the Reserve Bank;
  5. Declaration by the proposed directors/ shareholders that there is no criminal case, including for offence under section 138 of the Negotiable Instruments Act, against them; and
  6. Bankers’ Report on the proposed directors/ shareholders.

(ii) Applications in this regard may be submitted to the Regional Office of the Department of Non-Banking Supervision in whose jurisdiction the Registered Office of the NBFC is located.

Further RBI has mandated that prior public notice of 30 days in advance is required to be given for change in control/ management of NBFC.

i. A public notice of at least 30 days shall be given before effecting the sale of, or transfer of the ownership by sale of shares, or transfer of control, whether with or without sale of shares. Such public notice shall be given by the NBFCs and also by the other party or jointly by the parties concerned, after obtaining the prior permission of the Reserve Bank.

ii. The public notice shall indicate the intention to sell or transfer ownership/ control, the particulars of transferee and the reasons for such sale or transfer of ownership/ control. The notice shall be published in at least one leading national and in one leading local (covering the place of registered office) vernacular newspaper.

5. The directions contained above are applicable with immediate effect, i.e., the same will apply on any takeover or acquisition of control, any change in the shareholding or any change in the management occurring after the date of this circular.

6. Any violation of the aforementioned directions would result in adverse regulatory action including cancellation of CoR.

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NBFCs – Revised Regulatory Framework

RBI has issued revised NBFC regulatory framework as per this circular i.e. http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=9327&Mode=0.

Salient features are

1) Net Owned Funds of Rs.2 crores required for all NBFCs even those old ones

2) Systemically Important NBFCs now above Rs.500 crores revised from Rs.200 crores

3) All Asset Finance Companies to get themselves rated with Investment grade rating before accepting deposits or renewing deposits

4) Prudential norms eased for NBFC-NDs i.e. non deposit taking ones not required to maintain KYC, Fair Practices Code etc.

5) Board Committee requirements streamlined for different categories of NBFCs.

6) Fit and proper criteria introduced for Directors in SI and D category of NBFCs i.e. Systemically Important and deposit taking

The detailed copy of the circular is given below:

All NBFCs (excluding Primary Dealers)

Dear Sirs,

Revised Regulatory Framework for NBFC

The NBFC (Non-Banking Finance Company) sector has evolved considerably in terms of its size, operations, technological sophistication, and entry into newer areas of financial services and products. NBFCs are now deeply interconnected with the entities in the financial sector, on both sides of their balance sheets. Being financial entities, they are as exposed to risks arising out of counterparty failures, funding and asset concentration, interest rate movement and risks pertaining to liquidity and solvency, as any other financial sector player. At the same time there are segments within the sector that do not pose any significant risks to the system. There is therefore, a felt need to address the risks, without impeding the dynamism displayed by NBFCs in delivering innovation and last mile connectivity for meeting the credit needs of the productive sectors of the economy.

2. With the above background, a review of the entire regulatory framework for the NBFC sector has been undertaken with a view to transitioning, over time, to an activity based regulation of NBFCs. As a first step in this direction, certain changes to the regulatory framework are sought to be made to a) address risks wherever they exist, b) address regulatory gaps and arbitrage arising from differential regulations, both within the sector as well as vis-a-vis other financial institutions, c) harmonise and simplify regulations to facilitate a smoother compliance culture among NBFCs, and d) strengthen governance standards.

3. In doing so, certain important recommendations made by the Working Group on Issues and Concerns in the NBFC Sector (Chairperson: Smt. Usha Thorat) and the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households (Chairman: Dr. Nachiket Mor), have been drawn upon. The changes now introduced to the regulatory framework are delineated below.

4. Requirement of Minimum NOF of Rs. 200 lakh

4.1 NBFCs are required to obtain a Certificate of Registration (CoR) from the Bank to commence/carry on business of NBFI in terms of Section 45-IA of the RBI Act, 1934. The said section also prescribes the minimum Net Owned Fund (NOF) requirement. In terms of Notification No.DNBS.132/CGM(VSNM)-99 dated April 21, 1999, the minimum NOF requirement for new companies applying for grant of CoR to commence business of an NBFC is stipulated at Rs. 200 lakh. Although the requirement of minimum NOF at present stands at Rs. 200 lakh, the minimum NOF for companies that were already in existence before April 21, 1999 was retained at Rs. 25 lakh. Given the need for strengthening the financial sector and technology adoption, and in view of the increasing complexities of services offered by NBFCs, it shall be mandatory for all NBFCs to attain a minimum NOF of Rs. 200 lakh by the end of March 2017, as per the milestones given below:

  • Rs. 100 lakh by the end of March 2016
  • Rs. 200 lakh by the end of March 2017

4.2 It will be incumbent upon such NBFCs, the NOF of which currently falls below Rs. 200 lakh, to submit a statutory auditor’s certificate certifying compliance to the revised levels at the end of each of the two financial years as given above.

4.3 NBFCs failing to achieve the prescribed ceiling within the stipulated time period shall not be eligible to hold the CoR as NBFCs. The Bank will initiate the process for cancellation of CoR against such NBFCs.

5. Deposit Acceptance

5.1 As per extant NBFCs Acceptance of Public Deposit (Reserve Bank) Directions, 1998, an unrated Asset Finance Company (AFC) having NOF of Rs. 25 lakh or more, complying with all the prudential norms and maintaining capital adequacy ratio of not less than fifteen per cent, is allowed to accept or renew public deposits not exceeding one and half times of its NOF or up to Rs. 10 crore, whichever is lower. AFCs which are rated and complying with all the prudential regulations are allowed to accept deposits up to 4 times of their NOF.

5.2 In order to harmonise the deposit acceptance regulations across all deposit taking NBFCs (NBFCs-D) and move over to a regimen of only credit rated NBFCs-D accessing public deposits, existing unrated AFCs shall have to get themselves rated by March 31, 2016. Those AFCs that do not get an investment grade rating by March 31, 2016, will not be allowed to renew existing or accept fresh deposits thereafter. In the intervening period, i.e. till March 31, 2016, unrated AFCs or those with a sub-investment grade rating can only renew existing deposits on maturity, and not accept fresh deposits, till they obtain an investment grade rating.

5.3 It has been decided to harmonise the limit for acceptance of deposits across the sector by reducing the same for rated AFCs from 4 times to 1.5 times of NOF, with effect from the date of this circular. While AFCs holding deposits in excess of the revised limit should not access fresh deposits or renew existing ones till they conform to the new limit, the existing deposits will be allowed to run off till maturity. It must be mentioned here that the data available with the Reserve Bank indicates that most AFCs are already complying with the revised norms and very few NBFCs have deposits in excess of 1.5 times of the NOF. Also, in cases where this limit is exceeded, the excess is not substantial. It is therefore expected, that this harmonization measure will not be disruptive.

6. Systemic Significance

6.1 Currently, NBFCs are categorized into three groups for the purpose of administering prudential regulations namely, NBFCs-D, non-deposit taking NBFCs (NBFCs-ND) with assets less than Rs.100 crore and NBFCs-ND-SI with assets Rs.100 crore and above, (categorised as non–deposit taking systemically important NBFCs, vide circular DNBS.PD/CC.No.86/03.02.089/2006-07, dated December 12, 2006). The current prudential regulation mainly comprises the following elements: a) Norms relating to Income Recognition, Asset Classification and Provisioning norms; b) Capital to Risk Weighted Assets Ratio (CRAR); and c) Credit Concentration Norms [norms at b) and c) are applicable to only NBFCs–D and NBFCs-ND-SI].

6.2 The threshold for defining systemic significance for NBFCs-ND has been revised in the light of the overall increase in the growth of the NBFC sector. NBFCs-ND-SI will henceforth be those NBFCs-ND which have asset size of Rs. 500 crore and above as per the last audited balance sheet.

6.3 With this revision in the threshold for systemic significance, NBFCs-ND shall be categorized into two broad categories viz.,

  1. NBFCs-ND (those with assets of less than Rs. 500 crore) and
  2. NBFCs-ND-SI (those with assets of Rs. 500 crore and above).

7. Multiple NBFCs

7.1 NBFCs that are part of a corporate group or are floated by a common set of promoters will not be viewed on a standalone basis. The total assets of NBFCs in a group including deposit taking NBFCs, if any, will be aggregated to determine if such consolidation falls within the asset sizes of the two categories mentioned in para 6.3 above. Regulations as applicable to the two categories will be applicable to each of the NBFC-ND within the group. For this purpose, Statutory Auditors would be required to certify the asset size of all the NBFCs in the Group. However, NBFC-D, within the group, if any, will be governed under the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Direction 1998 and Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 and other applicable Directions.

7.2 The definition of the word “group” will be the same as per Accounting Standards. “Companies in the Group”, shall mean an arrangement involving two or more entities related to each other through any of the following relationships:

  • Subsidiary – parent (defined in terms of AS 21),
  • Joint venture (defined in terms of AS 27),
  • Associate (defined in terms of AS 23),
  • Promoter – promotee [as provided in the SEBI (Acquisition of Shares and Takeover) Regulations, 1997],
  • For listed companies, a related party (defined in terms of AS 18), common brand name, and investment in equity shares of 20% and above.

8. Prudential Norms

8.1 One of the main objectives of prudential regulation is to address systemic risks. The systemic risks posed by NBFCs functioning exclusively out of their own funds and NBFCs accessing public funds cannot be equated and hence cannot be subjected to the same level of regulation. Hence, as a principle, enhanced prudential regulations shall be made applicable to NBFCs wherever public funds are accepted and conduct of business regulations will be made applicable wherever customer interface is involved.

8.2 In conformity with the above principles, the regulatory approach in respect of NBFCs-ND with an asset size of less than Rs. 500 crore will be as under:

(i) They shall not be subjected to any regulation either prudential or conduct of business regulations viz., Fair Practices Code (FPC), KYC, etc., if they have not accessed any public funds and do not have a customer interface.

(ii) Those having customer interface will be subjected only to conduct of business regulations including FPC, KYC etc., if they are not accessing public funds.

(iii) Those accepting public funds will be subjected to limited prudential regulations but not conduct of business regulations if they have no customer interface.

(iv) Where both public funds are accepted and customer interface exist, such companies will be subjected both to limited prudential regulations and conduct of business regulations.

(v) Irrespective of whichever category the NBFC falls in, registration under Section 45 IA of the RBI Act will be mandatory.

(vi) All of the above will also be subjected to a simplified reporting system which shall be communicated separately.

8.3 All NBFCs-ND with assets of Rs. 500 crore and above, irrespective of whether they have accessed public funds or not, shall comply with prudential regulations as applicable to NBFCs-ND-SI. They shall also comply with conduct of business regulations if customer interface exists.

Note: For the purpose of this circular, the term ‘public funds’ includes “funds raised directly or indirectly through public deposits, commercial papers, debentures, inter-corporate deposits and bank finance, but excludes funds raised by issue of instruments compulsorily convertible into equity shares within a period not exceeding 5 years from the date of issue”.

Prudential Regulations Applicable to NBFCs-ND with Assets less than Rs. 500 crore

8.4 Consequent to the redefining of ‘systemic significance’ the NBFCs-ND with asset size of less than Rs. 500 crore, are exempted from the requirement of maintaining CRAR and complying with Credit Concentration Norms.

8.5 A leverage ratio of 7 is being introduced for all such NBFCs-ND to link their asset growth with the capital they hold. For this purpose, leverage ratio is defined as Total Outside Liabilities / Owned Funds.

Prudential Regulations Applicable to NBFCs-ND-SI (asset of Rs. 500 crore and above) and all NBFCs-D

Tier 1 Capital

8.6 At present, all NBFCs-D and NBFCs-ND with asset size of Rs.100 crore and above are required to have minimum CRAR of 15%. Consequently, Tier 1 capital cannot be less than 7.5%. For Infrastructure Finance Companies (IFCs), however, Tier 1 capital cannot be less than 10%. Similarly, NBFCs primarily engaged in lending against gold jewellery have to maintain a minimum Tier 1 capital of 12% w.e.f. April 01, 2014.

8.7 Given the business activities of NBFCs, being generally ‘niche’ in nature, concentration risk associated with such businesses, and on account of the re-definition of systemic importance, all NBFCs-ND which have an asset size of Rs. 500 crore and above, and all NBFCs-D, shall maintain minimum Tier 1 Capital of 10%. The compliance to the revised Tier 1 capital will be phased in as follows:

  • 8.5% by end of March 2016.
  • 10% by end of March 2017.

Asset Classification

8.8 At present, an asset is classified as Non-Performing Asset when it has remained overdue for a period of six months or more for loans; and overdue for twelve months or more in case of lease rental and hire purchase instalments, as compared to 90 days for banks. In the interest of harmonisation, the asset classification norms for NBFCs-ND-SI and NBFCs-D are being brought in line with that of banks, in a phased manner, as given below.

8.9 Lease Rental and Hire-Purchase Assets shall become NPA:

  1. if they become overdue for 9 months (currently 12 months) for the financial year ending March 31, 2016;
  2. if overdue for 6 months for the financial year ending March 31, 2017; and
  3. if overdue for 3 months for the financial year ending March 31, 2018 and thereafter.

8.10 Assets other than Lease Rental and Hire-Purchase Assets shall become NPA:

  1. if they become overdue for 5 months for the financial year ending March 31, 2016;
  2. if overdue for 4 months for the financial year ending March 31, 2017; and
  3. if overdue for 3 months for the financial year ending March 31, 2018 and thereafter.

8.11 For all loan and hire-purchase and lease assets, sub-standard asset would mean:

  1. an asset that has been classified as NPA for a period not exceeding 16 months (currently 18 months) for the financial year ending March 31, 2016;
  2. an asset that has been classified as NPA for a period not exceeding 14 months for the financial year ending March 31, 2017; and
  3. an asset that has been classified as NPA for a period not exceeding 12 months for the financial year ending March 31, 2018 and thereafter.

8.12 For all loan and hire-purchase and lease assets, doubtful asset would mean:

  1. an asset that has remained sub-standard for a period exceeding 16 months (currently 18 months) for the financial year ending March 31, 2016;
  2. an asset that has remained sub-standard for a period exceeding 14 months for the financial year ending March 31, 2017; and
  3. an asset that has remained sub-standard for a period exceeding 12 months for the financial year ending March 31, 2018 and thereafter.

8.13 For the existing loans, a one-time adjustment of the repayment schedule, which shall not amount to restructuring will, however, be permitted.

Provisioning for Standard Assets

8.14 At present, every NBFC is required to make a provision for standard assets at 0.25% of the outstanding. On a review of the same, the provision for standard assets for NBFCs-ND-SI and for all NBFCs-D, is being increased to 0.40%. The compliance to the revised norm will be phased in as given below:

  • 0.30% by the end of March 2016
  • 0.35% by the end of March 2017
  • 0.40% by the end of March 2018

Credit / Investment Concentration Norms for AFCs

8.15 As a step towards meeting the broad objective of harmonizing regulations to the extent possible within the NBFC sector, the credit concentration norms for AFCs are now being brought in line with other NBFCs. This will be applicable with immediate effect for all new loans excluding those already sanctioned. All existing excess exposures would be allowed to run off till maturity.

9. Corporate Governance and Disclosure norms for NBFCs

9.1 The need for adoption of good corporate governance practices continues to engage the regulator and stakeholder attention. In this connection, in continuation of previouscirculars DNBS(PD) CC. No.61/02.82/2005-06 dated December 12, 2005, DNBS(PD) CC. No.94/03.10.042/2006-07 dated May 8, 2007 and DNBS(PD) CC. No.104/03.10.042/2007-08 dated July 11, 2007 on Corporate Governance, certain amendments to the Corporate Governance guidelines are made as given below.

9.2 In terms of the above mentioned circulars, NBFCs-D with deposits of Rs. 20 crore and above, and NBFCs-ND with asset size of Rs. 50 crore and above are required to constitute an Audit Committee; NBFCs-D with deposits of Rs. 20 crore and above, and NBFCs-ND with assets of Rs. 100 crore and above are advised to consider constituting Nomination Committee to ensure ‘fit and proper’ status of proposed/ existing Directors and Risk Management Committee. Further, NBFCs-D with deposits of Rs. 50 crore and above were advised that it was desirable that they stipulate rotation of partners of audit firms appointed for auditing the company every three years.

Board Committees

9.3 As part of harmonisation, the constitution of the three Committees of the Board and instructions with regard to rotation of partners have now been made applicable to all NBFCs-ND-SI, as also all NBFCs-D. Other NBFCs are encouraged to observe such practices, if already being followed.

9.4 In addition, the Audit Committee of all NBFCs-ND-SI, as also all NBFCs-D must ensure that an Information Systems Audit of the internal systems and processes is conducted at least once in two years to assess operational risks faced by the company.

Fit and Proper Criteria for Directors

9.5 With the increasing integration of NBFCs in the financial sector and their growing systemic significance, it has become important that the Directors and shareholders who are responsible for steering the affairs of the companies are fit and proper, besides having the necessary qualifications. In view of this, the following additional requirements are being put in place, which shall be applicable to all NBFCs-ND-SI, as also all NBFCs-D, with effect from March 31, 2015.

  1. NBFCs shall ensure that there is a policy put in place for ascertaining the fit and proper criteria at the time of appointment of Directors and on a continuing basis. The policy on the fit and proper criteria should be on the lines of the Guidelines contained in Annex 1.
  2. A declaration and undertaking shall be obtained from the Directors by the NBFC, the draft of which is given in Annex 2.
  3. In addition, the Directors shall sign a Deed of Covenant as given in Annex 3.
  4. NBFCs shall furnish to the Reserve Bank a quarterly statement on change of Directors certified by the auditors and a certificate from the Managing Director that fit and proper criteria in selection of directors have been followed. The statement must reach the Regional Office concerned of the Reserve Bank within 15 days of the close of the quarter.

Disclosures in Financial Statements – Notes to Account

9.6 A reference is invited to DNBS.(PD)C.C.No.25/ 02.02/ 2002-03 March 29, 2003 and DNBS(PD).CC.No.125/ 03.05.002/ 2008-2009 August 1, 2008 under which NBFCs with assets of Rs. 100 crore and above were required to make additional disclosures in their balance sheets from the year ending March 31, 2009 relating to CRAR, exposure to real estate sector (both direct and indirect), and maturity pattern of assets and liabilities respectively. The above disclosures are now applicable for NBFCs-ND-SI (as redefined) and for all NBFCs-D. However, other NBFCs already disclosing the above are encouraged to continue to do so, in line with prudent practice.

9.7 The extant disclosures are however far from comprehensive. There is need for greater transparency to provide enhanced information to the market and retain stakeholder confidence. It has hence been decided that in addition to the above disclosures, all NBFCs-ND-SI (as redefined), as also all NBFCs-D shall additionally disclose the following in their Annual Financial Statements, with effect from March 31, 2015:

  1. Registration/ licence/ authorisation obtained from other financial sector regulators;
  2. Ratings assigned by credit rating agencies and migration of ratings during the year;
  3. Penalties, if any, levied by any regulator;
  4. Information viz., area, country of operation and joint venture partners with regard to Joint Ventures and Overseas Subsidiaries; and
  5. Asset liability profile, extent of financing of parent company products, NPAs and movement of NPAs, details of all off-balance sheet exposures, structured products issued by them as also securitization/ assignment transactions and other disclosures as given in Annex 4.

10. Off-Site Reporting

In view of the revised regulations, NBFCs-ND, with assets less than Rs. 500 crore, including investment companies, shall henceforth be required to submit only a simplified Annual Return, the details of which shall be separately communicated. Till such time, they may continue to submit the existing Returns. NBFCs-ND-SI (as redefined), as also NBFCs-D, shall continue to submit the existing Returns.

11. Exemptions

11.1 In the circular dated March 21, 2014 on Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalizing Distressed Assets in the Economy, ‘Notified NBFCs’ in the circular shall henceforth be defined as a) NBFCs with assets of Rs. 100 crore and above, b) NBFCs-D, and c) all NBFC-Factors.

11.2 The revisions brought through this circular shall be applicable to NBFCs-MFI also except wherever in conflict with the provision of Non-Banking Financial Company- Micro Finance Institutions (Reserve Bank) Directions, 2011, in which case the Directions ibid will be followed.

11.3 The minimum Tier 1 capital requirement for NBFCs primarily engaged in lending against gold jewellery remains unchanged for the present. This shall be reviewed for harmonization in due course.

11.4 The above revisions shall be applicable to registered Core Investment Companies except wherever contrary with the provisions of Core Investment Companies (Reserve Bank) Directions, 2011, in which case the Directions ibid will be followed.

Application of other Laws not barred

12. The provisions of these Directions shall be in addition to, and not in derogation of the provisions of any other law, rules, regulations or directions, for the time being in force.

13. The RBI may, if it considers necessary for avoiding any hardship or for any other just and sufficient reason, exempt any NBFC or class of NBFCs, from all or any of the provisions of these Directions either generally or for any specified period, subject to such conditions as the RBI may impose.

14. The Notifications in this regard shall follow.

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Filing of records of equitable mortgages with Central Registry

RBI has issued a notification on 12th November 2013 wherein it has specified that equitable mortgages created in favour of Non Banking Financial Companies should in turn be registered/ filed with a Central Registry which has been created for this purpose which is called Central Registry of Securitisation Asset Reconstruction and the Security Interest of India. (CERSAI). The institutions which have been notified under SARFAESI Act have to mandatorily record the equitable mortgages created in their favour whereas other institutions can also do so. The details of security interest created in favour of these institutions will be available on a public search engine for public citizens as well as banks/ financial institutions so that double financing could be avoided. So all the NBFCs have been advised to file their data base of mortgages created in favour with the Central Registry from 1st April 2011 onwards. The full text of the RBI Circular is available at http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8571&Mode=0

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