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Bombay Chartered Accountants’ Society
CA Bhavesh Vora – 04/08/2016
NBFC Prudential Norms &
Compliances – Important Aspects
Coverage
04/08/2016BCAS - CA Bhavesh Vora2
Existence of NBFCs
Last Decade of NBFC
Banks Vs. Non-Banks
Meaning of NBFCs
Major Changes in 2007-08
Recent Developments
Applicability and Issues
Public Funds Vs. Public Deposits
Income Recognition
Accounting as per Prudential Norms
Asset Classification and Provisioning
Capital Adequacy
Leverage Ratio
Coverage (Contd.)
04/08/2016BCAS - CA Bhavesh Vora3
Loan against Shares
Credit Concentration Norms
Restructuring of Advances
Disclosures to be made
Submissions to RBI
Policies and Committees
Corporate Governance
Restrictions on Investments
Prohibitions
Change in Control
Penal Provisions
Miscellaneous Compliances
Future of NBFC Sector
Financial System
Financial Assets/
InstrumentsFinancial Markets
Financial
Intermediaries
Capital
Market
Money
MarketCredit Market
Primary Market
Secondary Market
Money Market
Instrument
Capital Market
Instrument Hybrid Instrument
Forex Market
BCAS - CA Bhavesh Vora4 04/08/2016
Companies
(Registered under Section 2(20) of the Companies Act 2013)
NBFC Regulated by Other Regulators
Non Banking Non
Financial Companies
Regulation,
Supervision,
Surveillance under the
Companies Act 2013.
Regulator:
Ministry of Corporate
Affairs (MCA)
Enforcement Agency :
State Governments
NBFCs
Registered with
RBI *
Regulation,
Supervision,
Surveillance &
Enforcement
under RBI
Type of Financial
Institutions
Authority for Regulation,
Supervision. Surveillance
& Enforcement
Housing Financial Inst. National Housing Bank
Merchant Banking Co,
Venture Cap Fund Co, Stock
Broking, CIS
SEBI
Nidhi Companies,
Mutual Benefit Co
MCA
Chit Fund Companies State Govt.
Insurance Companies IRDA
04/08/2016BCAS - CA Bhavesh Vora5
Existence of NBFCs
04/08/2016BCAS - CA Bhavesh Vora6
Effective Financial Intermediary
Earlier there were no entry norms and no requirement for
compulsory registration
Amendment related to compulsory registration came in
January 1997
Various Norms prescribed
Prudential Norms
Auditor’s Direction
Prohibition on Acceptance of Deposits, etc…
Last Decade of NBFC
04/08/2016BCAS - CA Bhavesh Vora7
Qualitative changes in functioning
Effective Financial Intermediation
Customization of Service and quicker decisions
Innovative Products
Increasing Financial Assets and becoming like a
small Bank
Gaining Sectoral Importance
Banks Vs. Non-Banks
04/08/2016BCAS - CA Bhavesh Vora8
Both are Financial Intermediaries
Banks can:
Maintain Demand Deposits (Savings/Current A/c)
Form a part of Payment and Settlement Mechanism
Non-Banks can:
Accept only Term Deposits
Does not form part of Payment and Settlement
Mechanism
Meaning of NBFC
04/08/2016BCAS - CA Bhavesh Vora9
As per Section 45-I(f) of the RBI Act, 1934 ‘Non Banking Financial
Company’ means –
A ‘Financial Institution’ which is a Company;
A Non-Banking Institution which is a company and which has as its
Principal Business the receiving of deposits, under any scheme or
arrangement or in any other manner, or lending in any manner;
Such other Non-Banking Institution or class of such institutions, as RBI
specifies
.
‘Non-Banking Institution’ - means a
company, corporation or co-operative society
Major Changes in 2007-08
04/08/2016BCAS - CA Bhavesh Vora10
Non-Banking Financial (Non- Deposit Accepting or
Holding) Companies Prudential Norms (Reserve Bank)
Directions, 2007
Non-Banking Financial Companies Auditor’s Report
(Reserve Bank) Directions, 2008
Additional obligation to NBFC-ND
Introduction of Systemically Important NBFCs (ND-SI)
Recent Developments (2015)
04/08/2016BCAS - CA Bhavesh Vora11
New prudential norms and revamp of old directions related to SIand Non-SI NBFCs based on regulatory framework issued inNovember 2014 (27th March, 2015) Systemically Important NBFC (Non-Deposit Accepting or Holding)
Companies Prudential Norms, 2015 Non-Systemically Important NBFC (Non-Deposit Accepting or
Holding) Companies Prudential Norms, 2015
Corporate governance directions 2015 introduced (10th April,2015)
Master Circular dated 03rd June 2015 and 11th June 2015 onprudential norms for Non-Systemically and SystemicallyImportant NBFCs respectively.
Exemption to specified NBFCs from Credit Concentration Norms
Very Recent Developments (Contd.)
04/08/2016BCAS - CA Bhavesh Vora12
Classification of NBFCs into Type-I (No Public
Funds and Customer Interface) and Type-II
(Public Funds and Customer Interface)
Submission of Application at Central Office
KYC Directions, 2016
Public Funds Vs. Public Deposits
04/08/2016BCAS - CA Bhavesh Vora13
Public Funds include funds raised directly or indirectly through:
Public Deposits
Commercial Papers
Debentures
Inter-Corporate Deposits
Bank Finance
And exclude:
Funds raised by issue of compulsory convertible instruments within a period not exceeding five years from the date of issue
Public Funds
Public
Deposits
Systemically and Non-Systemically ND-
NBFCs
04/08/2016BCAS - CA Bhavesh Vora14
Relevance of Last Audited Balance Sheet
NOF for NBFCs – Rs. 200 Lakhs (Registered/Applied after 20th April 1999) Rs. 100 Lakhs by 31st March 2016
Rs. 200 Lakhs by 31st March 2017
Asset Size of the Group Companies to be clubbed
Particulars Non-Systemically Important Systemically Important
Asset Size Less than Rs. 500 crores Rs. 500 crores and Above
Not Accessing Public
funds
Exempt from observing Prudential
Norms, 2015 (Except Annual
Certificate)
Exempt from Credit
Concentration Norms
Applicability
04/08/2016BCAS - CA Bhavesh Vora15
In order to identify a particular Company as NBFC, the
Asset-Income Pattern of the last audited Balance Sheet is to
be considered for the principal business criteria
Fixed Deposits with banks are not considered Financial Assets
Financial Assets are more than 50% of Total Assets (Net
of Intangible Assets)
Financial Income is more than 50% of Total Income
(Gross)
AND
Issues experienced
04/08/2016BCAS - CA Bhavesh Vora16
Issues of 50%-50% Criteria
Profit and Loss A/c not maintained
Derivative Trading
Commodity Trading
Continued Adherence
Investment in Partnership Firms (for Deemed NBFCs)
Issues of Net Owned
Deduction of Investment in Group Companies for Credit
Concentration Norms
Applicability of Prudential Norms
04/08/2016BCAS - CA Bhavesh Vora17
NBFC-ND-NSI (Asset Size below 500 Crores)
Non-Systemically Important Non-Banking Financial (Non-
Deposit Accepting or Holding) Companies Prudential Norms
(Reserve Bank) Directions, 2015
NBFC-ND-SI (Asset Size above 500 Crores)
Systemically Important Non-Banking Financial (Non-Deposit
Accepting or Holding) Companies Prudential Norms (Reserve
Bank) Directions, 2015
NBFC-D (Deposit Accepting NBFCs)
Non-Banking Financial (Deposit Accepting or Holding)
Companies Prudential Norms (Reserve Bank) Directions, 2007
Income Recognition
04/08/2016BCAS - CA Bhavesh Vora18
The Income of an NBFC should be recognized as per the
Accounting Principles
Income on Non-Performing Assets (NPA) is to be recognized
only on realization
Any such income recognized before the Asset becomes NPA
should be reversed
Income on investments are to be recognized on cash basis,
provided income on which right to receipt is established, is
to be recognized on becoming due
Accounting
04/08/2016BCAS - CA Bhavesh Vora19
Accounting Standards (AS) are to be followed unless they are
inconsistent with prudential norms
Every NBFC is to frame an Investment Policy as per the
applicable prudential norms for accounting of investments
Investments are to be classified as current or long-term at the
time of making such investment
Inter Class transfer on ad-hoc basis not permitted
Quoted Current Investment – Cost or Market Value
Unquoted Equity Shares – Cost or Breakup/Fair Value
Unquoted Preference Shares – Cost or Face Value
Asset Classification
04/08/2016BCAS - CA Bhavesh Vora20
Every NBFC has to classify its lease/hire purchase
assets, loans and advances and any other forms of
credit into:
Standard Assets
Sub-Standard Assets
Doubtful Assets
Loss Assets
The Class of Assets cannot be upgraded merely
upon rescheduling (Unless it satisfies conditions
for upgradation)
Provisioning Requirements
04/08/2016BCAS - CA Bhavesh Vora21
The NBFCs are to provide for the assets classified in the
following manner:
Standard Assets – 0.25% (For NSI) 0.3% (0.25%-0.4%)(For SI and NBFC-D) Disclosed as “Contingent Provisions against Standard Assets”
Sub-Standard Asset – 10%
Doubtful Assets (Secured Portion) Upto one year – 20% One to three years – 30% More than three years – 50%
Doubtful Assets (Unsecured Portion) – 100%
Loss Assets – 100%
Additional Provisioning
04/08/2016BCAS - CA Bhavesh Vora22
Additional Provisioning is required for Hire Purchase and Lease Assets (On net book value)
HC/LR overdue upto 12 months – 0%
HC/LR overdue between 12-24 months – 10%
HC/LR overdue between 24-36 months – 40%
HC/LR overdue between 36-48 months – 70%
HC/LR overdue for more than 48 months – 100%
On expiry of a period of 12 months after the due date of the last installment of hire purchase/ leased asset, the entire net book value shall be fully provided for
(HC/LR = Hire Charges or Lease Rentals)
Capital Adequacy
04/08/2016BCAS - CA Bhavesh Vora23
Particulars NBFC-ND-SI NBFC-ND-NSI NBFC-D
Capital Ratio to Risk-
weighted/Adjusted Ratio Limit
15% 15%
(Only for MFI and
IFC)
15%
Tier II to Tier I Capital Ratio
Limit
100%
(Only for MFI)
100%
(Only for MFI)
100%
(Only for MFI)
Tier I Capital not to exceed 8.5% by M16
10% by M17
10%
(Only for IFC)
8.5% by M16
10% by M17
Leverage Ratio
04/08/2016BCAS - CA Bhavesh Vora24
Every Non-Systemically Important Non-Banking Financial
Company is to maintain a Leverage Ratio with a maximum
limit of seven
Note:
Leverage Ratio is the Ratio of Outside Liabilities to Owned
Funds
Loan Against Shares
04/08/2016BCAS - CA Bhavesh Vora25
NBFCs having asset size above Rs. 100 Crores and
lending against collateral of shares have to:
Maintain LTV of 50% at all times. Lowering of LTV due to
price fluctuations is to be made good within 7 working days
For lending for investment in capital markets, only Group 1
securities can be accepted as collateral for value of loan above
Rs. 5 lakhs
Report online to stock exchanges on quarterly basis the
information of shares pledged in the prescribed format
Credit Concentration Norms
04/08/2016BCAS - CA Bhavesh Vora26
NBFC-SIs accepting public funds and NBFC-Ds cannot
Lend to:
A single borrower in excess of 15% of Owned Funds
A single group of borrowers in excess of 25% of Owned Funds
Invest In:
Shares of another Company in excess of 15% of Owned Fund
Shares of single group of companies in excess of 25% of Owned Funds
Lend and Invest:
In excess of 25% of Owned Fund to a single party
In excess of 40% of Owned Fund to a single group of parties
Credit Concentration Norms (Contd.)
04/08/2016BCAS - CA Bhavesh Vora27
Such Ceiling on Credit/Investment is not applicable to:
Investment in equity shares of insurance company upto the
extent permitted by RBI
Investments/Loans to Companies in the Group to the extent
they are deducted from Owned Funds to arrive at Net
Owned Funds (NOF)
Applicable NBFCs are to formulate a policy in respect of
exposures to a single party/single group of parties
Restructuring of Advances
04/08/2016BCAS - CA Bhavesh Vora28
Date of Completion and Date of Commencement of
Commercial Operations
Division of Loans into Infrastructure and Non-Infrastructure
Sector
Infrastructure Loan classified as NPA
Infrastructure Loans delayed for reasons beyond the control
of promoters
Mere extension of DCCO not considered restructuring
Provisioning to be done as per the guidelines
Disclosures
04/08/2016BCAS - CA Bhavesh Vora29
Every NBFC Should follow Financial Year as accounting year (1st April to 31st March)
Prior approval of RBI is required for following any other accounting year
Provisioning made for the credit assets should be disclosed separately without netting it
Such provisions should be separate from depreciation and should not be an appropriation (i.e. to be recoded in P&L)
Every NBFC is to disclose a schedule of information in prescribed format as required under Para 13 of the prudential norms
Disclosures (Contd.)
04/08/2016BCAS - CA Bhavesh Vora30
Additionally, NBFC-SIs are to disclose:
Capital to Risk Assets Ratio
Exposure to Real Estate Sector (Both direct and indirect)
Maturity pattern of Assets and Liabilities
Percentage of Loans against Gold Jewellery to Total Assets is
to be disclosed if such loans are advanced
Restructured Loans are to be disclosed in the prescribed
format
Disclosures under Corporate Governance Norms
Submission of Information
04/08/2016BCAS - CA Bhavesh Vora31
Every NBFC has to communicate to Regional Office of RBI
changes in the following within one month from such
change:
Communication Details like Address, telephone number etc. of
registered Office
Names and Residential Address of Directors
Names and Official Designations of its Principal Officers
Names and Office Address of Statutory Auditors
Specimen Signatures of authorized officers
Submissions to RBI – NBFC-ND-SI
04/08/2016BCAS - CA Bhavesh Vora32
NBS7 – Quarterly – (Online)
NBS-ALM1 – Monthly – (Online)
NBS-ALM2 – Half-Yearly – (Online)
NBS-ALM3 – Half-Yearly – (Online)
Branch Info Return – (Online)
Statutory Auditors Certificate – Annually (Online)
Foreign Direct Investment Position – Half-Yearly (Even if there is no foreign funding) (Regional Office)
Overseas Direct Investment Position – Quarterly (Only if there is overseas investment) (Regional Office)
Board Resolution for Non-Acceptance of Public Deposits
Submissions to RBI – NBFC-ND-NSI
04/08/2016BCAS - CA Bhavesh Vora33
NBS8 –Yearly (For NBFC ND having asset size between 100
to 500 crores) (Online)
NBS9 –Yearly (For NBFC ND having asset size below 100
crores) (Online)
Branch Info Return – (Online)
Statutory Auditors Certificate – Annually (Online)
Board Resolution for Non-Acceptance of Public Deposits
Policy on Demand/Call Loans
04/08/2016BCAS - CA Bhavesh Vora34
Every NBFC intending to grant demand/call loans should
frame a policy and implement it
The Policy should include:
Cut-Off date
Rate of Interest
Interest – Payable at monthly or quarterly rests
Cut-Off date for performance review of loans (Not exceeding
six months from date of sanction)
Fair Practices Code
04/08/2016BCAS - CA Bhavesh Vora35
Loan Documentation
Application and Processing
Loan Appraisal and Terms and Conditions
Language of Documentation / Communication
Recovery of Loans
System of not charging excessive interest
Grievance Redressal Officer
Committees
04/08/2016BCAS - CA Bhavesh Vora36
Every NBFC-ND-SI and NBFC-D are to formulate
the following committees:
Audit Committee
Nomination Committee
Risk Management Committee
Corporate Governance Norms
04/08/2016BCAS - CA Bhavesh Vora37
Every NBFC-ND-SI and NBFC-D shall:
Frame internal guidelines on corporate governance
Frame a Fit and Proper Policy
Rotate partners of CA Firm every 3 years and ensure the
retiring partner completes the cooling off period of 3
years before re-appointment
Prohibitions
04/08/2016BCAS - CA Bhavesh Vora38
NBFCs are prohibited from:
Lending against its own shares
NBFC-D is prohibited to make investments or give loans if it
has defaulted in repayment of any deposit and for as long as
such default exists
All NBFCs are prohibited from becoming partners in
Partnership Firms
Further NBFCs require prior approval from RBI
For opening branches in excess of 1000 in number
Change in Control
04/08/2016BCAS - CA Bhavesh Vora39
Prior Approval from RBI
Takeover/Acquisition/Mergers/Amalgamation
Before approaching the court
Resulting in acquisition/transfer of shareholding of 26% or
more
Resulting in change of management of 30% or more
Progressive change over time
Public Notice of one month
Intimation of all the changes are to be communicated
Penal Provisions of RBI Act 1934
04/08/2016BCAS - CA Bhavesh Vora40
Broad Heading PenaltyReference
of Section
Doing NBFI Activities
without CoR
Imprisonment of 1 to 5 years
AND
Fine of Rs. 1 to 5 lakhs
58B (4A)
Non-Compliance of RBI
DirectionsImprisonment upto 3 years
58B (5)
- (a) & (b)
Failure to produce
documentation or answer
queries
Fine which may extend to Rs. 2000 per
offence and in case of continuous non-
compliance, additional fine upto Rs. 100
per day from the first offence
58 (B) (2)
Acceptance of Deposits
Imprisonment upto 3 years
AND
Fine of twice the amount received
58(B) (5A)
Miscellaneous Compliances
04/08/2016BCAS - CA Bhavesh Vora41
Membership of all Credit Information Companies
Core Investment Companies’ submission of
annual auditor’s certificate under CIC Directions
2011
Transfer to Statutory Reserve U/s 45-IC
Future of NBFC Sector
04/08/2016BCAS - CA Bhavesh Vora42
Peer to Peer Lending Crowd Funding Operational Business Models KYC Issues
Account Aggregator Only NBFC – AA Exemption to Regulated entities Prohibition form conducting any other business Cannot support transactions in financial assets
On Tap Licensing of Universal Banks Eligible Promoters Fit and Proper Criteria Minimum Capital Requirement Corporate Governance, Prudential and Exposure Norms