NBFC Directions, 1998

1. Important Directions applicable to NBFCs notified by RBI

1. NBFCs Acceptance of Public Deposits (Reserve Bank) Directions, 1998 [AOPDRBD] [Notified on 31-1-1998]
2. Non–Banking Financial Companies (Deposit Accepting or Holding) Prudential Norms (Reserve Bank) Directions, 2007 [PN(D)RBD] [Notified on 22-2-2007]; and Non–Banking Financial Companies (Non-Deposit Accepting or Holding) Prudential Norms (Reserve Bank) Directions, 2007 [PN(ND)RBD] [Notified on 22-2-2007]
3. Non–Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 2008 [ARRBD] [Notified on 18-9-2008]

2. Classification as an NBFC

The Reserve Bank of India has clarified that for a company to be classified as an NBFC, to decide on its principal business, it will have to satisfy the two tests of assets and income. The financial assets should be more than 50% of the total assets (netted off by intangible assets) and the income from financial assets should be more than 50% of the gross income. Both these tests need to be satisfied for a company to be regarded as an NBFC.

3. Registration Requirement

An NBFC cannot commence/carry on its business without –

1. Obtaining the certificate of registration from the RBI; and
2. Having NOF of ₹25 lakhs (₹200 lakhs for companies applying for registration after 21-4-1999).

4. Definition of "Public Deposits"

The definition of “Public Deposits” has been amended by the AOPDRBD to provide for exclusion therefrom of the following items:

1. Intercorporate deposits;
2. Deposits from shareholders of a private Co. and from Directors of a Limited Co. or from relative of a Director of the NBFC;
3. Amount received on issue of Optionally Convertible Debentures;
4. Amount received from promoters based on Financial Institution stipulations.

It should be noted that the above four categories of deposits remain restrictive deposits, and are hence, not exempt, during the period referred to in 3(a) above.

5. Net Owned Fund (NOF) is defined in S. 45-IA of the Reserve Bank of India Act, 1934 and includes

1. Paid-up equity capital,
2. Free reserves, and
3. Paid-up preference share capital that is compulsorily convertible into equity.

   From these items, one has to reduce,

   1. accumulated balance of loss;
   2. deferred revenue expenditure;
   3. intangible assets; and,
   4. excess of 10% of paid-up capital and “free reserves” over:
      • investment in shares of subsidiaries/group companies/ other NBFCs; and
      • investment in debentures/bonds/loans and advances (including HP/Lease Finance) made to subsidiaries/group Cos.

6. Deposit Acceptance Ceiling

6.1 In order to ensure a measured movement towards strengthening the financials of all deposit taking NBFCs, the NOF requirement is increased to a minimum of ₹ 200 lakh in a gradual, non-disruptive and non-discriminatory manner, the entitlement to hold/accept public deposits is amended w.e.f. 17-6-2008 vide Notification No. DNBS. 199/CGM (PK) - 2008 as under:

1. As a first step, NBFCs having minimum NOF of less than ₹ 200 lakh are required to freeze their deposits at the level currently held by them.
2. Further, Asset Finance Companies (AFC) having minimum investment grade credit rating and CRAR of 12% are required to bring down public deposits to a level that is 1.5 times their NOF while all other companies may bring down their public deposits to a level as per table given below by March 31, 2009:

Category of NBFC	Ceiling on public deposits prior to amendment	Revised Ceiling on public deposits
AFCs maintaining CRAR of 15% without credit rating and having NOF more than ₹25 lakh but less than ₹ 200 lakh	1.5 times of NOF or ₹ 10 crore whichever is less	Equal to NOF
AFCs with CRAR of 12% and having minimum investment grade credit rating and having NOF more than ₹ 25 lakh but less than ₹ 200 lakh	4 times of NOF	1.5 times of NOF
LCs/ICs with CRAR of and having minimum investment grade credit rating and having NOF more than ₹ 25 lakh but less than ₹ 200 lakh	15% 1.5 times of NOF	Equal to NOF

AFCs – Asset Finance Companies

LCs – Loan Companies

ICs – Investment Companies

CAR – Capital Adequacy Ratio

3. Those companies which are presently eligible to accept public deposits up to a certain level, but have, for any reason, not accepted deposits up to that level will be permitted to accept public deposits up to the revised ceiling prescribed above.
4. Companies on attaining the NOF of ₹ 200 lakh are required to submit statutory auditor’s certificate certifying its NOF.
5. The NBFCs failing to achieve the prescribed ceiling within the stipulated time period, are required to apply to the Reserve Bank for appropriate dispensation in this regard which may be considered on case-to-case basis.

6.2 Effective from April 24, 2004, NBFCs cannot accept deposits from NRIs except deposits by debit to NRO account of NRI provided such amount does not represent inward remittance or transfer from NRE/FCNR (B) account. However, the existing NRI deposits can be renewed.

7. Compliance with Liquidity Norms

7.1 NBFCs accepting/holding public deposits are required to invest in unencumbered approved securities as a percentage of deposits accepted. S. 45 IB of the RBI Act, 1934 provides for a percentage between 5% and 25% (as may be notified from time to time by the RBI) of the deposits outstanding at the close of the business of last day of the 2nd preceding quarter. A Quarterly Return is required to be submitted by an NBFC within 15 days of the month succeeding the quarter to which it relates.

As per Notification No. DFC.121/ED(G)-98 dated 31-1-1998 as amended from time-to-time and last being Notification No. DNBS (PD).205 / CGM (PK)-2009 dated 13-2-2009, NBFCs are required to invest in India in unencumbered approved securities, deposits or bonds valued at the price not exceeding the current market price of such securities an amount which shall, at the close of business on any day be not less than 15% of the Public Deposit with effect from 13-2-2009 in following manner:

• Not less than 10% in unencumbered approved securities
• Up to 5% in unencumbered (a) term deposits in any scheduled commercial bank, Small Industries Bank (SIDBI) or National Bank for Agriculture and Rural Development (NABARD) or (b) bonds issued by SIDBI or NABARD

7.2 Non–compliance with the liquidity requirements is liable to penal interest on the shortfall @ 3% above the bank rate for delay of one quarter and delay beyond that @ 5% above bank rate.

8. Ceiling on the rate of interest

The ceiling on the rate of interest is specified at 12.5% per annum w.e.f. 24th April, 2007. Prior to this, the ceiling on the rate of interest was 11% w.e.f. 4-3-2003.

9. Payment of Brokerage

An NBFC can pay to any broker for deposits collected by or through him, brokerage not in excess of the rate specified below:-

Particulars	Brokerage
Where a deposit is for a period not exceeding one year	One per cent of such deposit
Where a deposit is for a period exceeding one year but not exceeding two years	One and a quarter per cent (not per annum) of such deposit
Where a deposit is for a period not exceeding two years	One and a half per cent (not per annum) of such deposit

10. Maturity period and pre-mature encashment

10.1 The maturity period for public deposits is minimum 12 months and maximum 60 months.

10.2 Premature encashment of or grant of loan against deposits within 3 months not permitted except on death of depositor. Detailed provisions are made for premature repayment of deposit including payment of no interest, payment of interest at reduced rates, etc. Special provisions are made for “Problem” NBFCs and “tiny” public deposits.

NBFC has to maintain a Debenture Redemption Reserve @ 50% of the Debentures issued out of Public issue only.

11. Capital Adequacy Ratio (CAR)

A deposit taking NBFC is required to maintain a minimum capital ratio consisting of Tier I and Tier II capital which is not less than 12% of its aggregate risk weighted assets on balance sheet and of risk adjusted value of off-balance sheet items.

Similarly, every systemically important non-deposit taking NBFC is required to maintain, with effect from April 1, 2007, a minimum capital ratio consisting of Tier I and Tier II capital which is not less than 10% of its aggregate risk weighted assets on balance sheet and of risk adjusted value of off-balance sheet items. The CAR requirement is to be increased to 12% by March 31, 2010 and to 15% by March 31, 2011.

Further, the total of Tier II capital, at any point of time, cannot exceed 100% of Tier I capital.

12(A) Concentration of Credit/Investment

Every deposit taking NBFC and every systemically important non-deposit taking NBFC cannot

1. Lend to
   1. Any single borrower exceeding 15% of its owned fund; and
   2. Any single group of borrowers exceeding 25% of its owned fund;
2. Invest in
   1. The shares of another company exceeding 15% of its owned fund; and
   2. The shares of a single group of companies exceeding 25% of its owned fund;
3. lend and invest (loans/investments taken together) exceeding
   1. 25% of its owned fund to a single party; and
   2. 40% of its owned fund to a single group of parties.

An NBFC, classified as Asset Finance Company by the RBI, may in exceptional circumstances, exceed the above ceilings on credit/investment concentration to a single party or a single group of parties by 5 per cent of its owned fund, with the approval of its Board.

12(B) Loans against security of single product – gold jewellery

1. All NBFCs shall
   1. Maintain a Loan-to-Value (LTV) ratio not exceeding 60 per cent for loans granted against the collateral of gold jewellery and
   2. Disclose in their balance sheet the percentage of such loans to their total assets.
2. NBFCs should not grant any advance against bullion/ primary gold and gold coins. NBFCs primarily engaged in lending against gold jewellery (such loans comprising 50 per cent or more of their financial assets) shall maintain a minimum Tier l capital of 12 per cent by April 1, 2014.

13. Corporate Governance

RBI has laid down corporate governance guidelines for NBFCs vide RBI/2012-13/25/ DNBS(PD) CC No. 288/13.10.001/2012-13 that specify constitution of Audit, Nomination and Risk Management Committees and Disclosure & Transparencies. The guidelines in respect of Connected Lending have not been made operational vide Circular No. RBI/2007-2008/92/DNBS.PD/CC 104/03.10.042/2007-08 dated 11-7-2007.

The circular also recommends rotation of partners of the Statutory Auditors firm every three years for companies with public deposits/ deposits of ₹ 50 crore and above.

14. Mortgage Guarantee Company

The Mortgage Guarantee Company has been specified as an NBFC vide Circular DNBS/PD(MGC) C.C.111/03.11.001/2007-08 dated 15-1-2008 and the Regulatory Framework for the same including Prudential Norms and Investment Norms has been specified vide Notification DNBS(PD)MGC No.4/CGM (PK) – 2008 and Notification DNBS(PD)MGC No. 5 /CGM (PK) - 2008 both dated 15-2-2008. The details are contained in Circular No. RBI/2007-2008/238/DNBS/PD(MGC) C.C. 1/03.11.001/2007-08 dated 15-2-2008.

15. VideCircular No. RBI/2007-2008/258/DNBS (PD) CC. No. 8/SCRC/10.30.000/2007-2008 dated 5-3-2008, the Securitisation Companies and Reconstruction Companies are required to:

• Furnish the position of Owned Funds in Quarterly Statements SCRC1 as item No. 1; and
• Also furnish a copy of audited balance sheet along with the Directors Report/Auditors Report every year within one month from the date of Annual General Body Meeting, in which the audited results are adopted, starting with the balance sheet as on March 31, 2008.

16. Financial Year and Periodic Returns

16.1 An NBFC shall have its accounting year as the financial year ending on 31st March every year. Every non-banking financial company shall finalise its balance sheet within a period of 3 months from the date to which it pertains.

16.2 Every NBFC is required to submit the following to RBI:

1. Certificate from its Statutory Auditor that it is engaged in the business of non-banking financial institution requiring it to hold a Certificate of Registration under Section 45-IA of the RBI Act with reference to its position as at March 31 latest by June 30, every year. Such certificate to also indicate the asset/income pattern of the non-banking financial company for making it eligible for classification as Asset Finance Company, Investment Company or Loan Company.
2. Monthly return on exposure to capital market by every NBFC including RNBC with total assets of ₹100 crore and above in Form NBS-6 within 7 days from end of the month.

16.3 An NBFC accepting or holding public deposits is required to submit the following to RBI:

1. Annual Return of Deposits as per First Schedule to AOPDRBD within 6 months of the financial year.
2. Half yearly return on prudential norms in Form NBS 2 within 3 months of the end of half year.
3. Quarterly return on liquid assets in Form NBS 3 within 15 days of end of quarter.
4. Quarterly Return in Form NBS-5 – Monetary and Supervisory Return by all NBFCs holding public deposits of ₹20 crores and above.

16.4 An NBFC not holding/accepting public deposits is required to submit the following to RBI:

1. Monthly return on important financial parameters by non deposit accepting/holding NBFC having asset size of ₹100 crores and above within 7 days from end of the month.
2. Quarterly return of basic information from non-deposit taking NBFCs with asset size of ₹50 crores and above but less than ₹100 crores beginning from quartered ended September 30, 2008, within one month from end of the quarter.
3. Annual statement of capital funds, risk asset ratio etc., as at end of March every year in Form NBS-7 by every NBFC-SI-ND, i.e. Systemically Important non-deposit accepting/holding NBFCs with asset size of ₹100 crores, within 3 months from the close of the financial year.
4. Any of the following changes to be communicated within one month from the occurrence:
   1. Address, telephone or fax number of registered/corporate office
   2. Names and residential addresses of the directors of the company
   3. Names and the official designations of its principal officers
   4. Names and office address of the auditors of the company
   5. Specimen signatures of the officers authorised to sign on behalf of the company

17. Audit directions

The RBI has issued Notification No. DNBS. 201 /DG(VL)-2008 dated 18-9-2008 titled Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 2008 (the New Audit Directions) which apply to every auditor of an NBFC. The Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 1998 has been repealed by the New Audit Directions. The main provisions of the New Audit Directions are:

1. Auditors to submit additional report to the Board of Directors on the matters specified in paras 3 and 4 of the New Audit Directions.
2. Where the statement regarding any of the items referred to in para 3, is unfavourable or qualified, or in the opinion of the auditor the company has not complied with the provisions of the RBI Act or the NBFC Regulations, it shall be the obligation of the auditor to make a report containing the details of such unfavourable or qualified statements and/or about the non-compliance, as the case may be, in respect of the company to the concerned Office of the RBI.

18. Exemptions for provisions of RBI Act, 1934 – Master Circular Number DNBS.PD. CC.No. 282 /03. 02.004 / 2012-13 dated July 2, 2012.

The above master circular consolidates and updates all the instructions contained in the notifications listed in the Appendix pertaining to exemption from various provisions of RBI Act, 1934.