NBFCs - A quick guide

1. Non-Banking Financial
Companies: A Quick
Guide
Niddhi Parmar
M/s Vinod Kothari & Company
1006-1009, Krishna
224 AJC Bose Road
Kolkata – 700017
Phone 033-22811276/ 22813742/7715
E-mail – finserv@vinodkothari.com
601-C, Neelkanth,
98 Marine Drive,
Mumbai 400002
Phone 022-22817427
E-mail: bombay@vinodkothari.com
www.vinodkothari.com
Email: parmar@vinodkothari.com

2. Copyright
• The presentation is a property of Vinod
Kothari & Company. No part of it can be
copied, reproduced or distributed in any
manner, without explicit prior
permission.
• In case of linking, please do give credit
and full link
2

3. About Us
• Vinod Kothari and
Company,
▫ Based in Kolkata, Mumbai
• We are a team of
consultants, advisors &
qualified professionals
having recently
completed 25 years of
practice.
Our Organization’s Credo:
Focus on capabilities; opportunities follow
3

4. What is a NBFC?
4
• A Non-Banking Financial Company (NBFC) is a:
▫ Company registered under the Act, 1956 or Act, 2013; and
▫ Carrying business of financial institution
• Sec 45I (c) of the RBI Act defines “financial institution”.
1. Financing - by way of giving
loans, advances or otherwise
2. Acquisition of shares, stocks,
bonds, debentures or securities
3. Hire purchase
4. Insurance Business
5. Chits, kuries, etc business
6. Money circulation schemes
1. Agricultural operations
2. Industrial activity
3. Purchase or sale of any goods
(other than securities) or
4. Providing any services and
sale/purchase/construction of
immovable property
Includedinthedefinition
Excludedfromthedefinition

5. Test for determining a NBFC?
• How to identify whether the company is a NBFC or not?
▫ RBI vide its Press Release no. 1998-99/1269 dated April 8, 1999, laid
down the criteria for determining the principality of business
[popularly known as 50-50 principal business criteria]
 both the assets and the income pattern as evidenced from the last
audited balance sheet
▫ financial assets of a company
 more than 50 per cent of its total assets (netted off by intangible assets)
▫ income from financial assets
 more than 50 per cent of the gross income,
• The criteria of income/assets are cumulative, that is, both the tests
are required to be satisfied simultaneously as the determinant
factor for principal business of a company.
• Based on the above press release, the RBI has been insisting on
▫ obtaining an annual certificate from the auditor of an NBFC that the
company continues to carry on the business of an NBFC
 Circular No. DNBS (PD) C.C. No. 81/03.05.002/2006-07 dated October
18, 2006.

6. Difference between Banks &
NBFCs
6
• NBFCs activities are akin to that of Banks. However, below
mentioned are few differences:
▫ NBFC cannot accept demand deposits;
▫ NBFCs do not form part of the payment and settlement system and
cannot issue cheques drawn on itself;
▫ deposit insurance facility of Deposit Insurance and Credit Guarantee
Corporation is not available to depositors of NBFCs, unlike in case of
banks.

7. 7
Requirement of registration and
NOF
• Section 45-IA of the RBI Act states that –
▫ no non-banking financial company shall commence or carry on
the business of a non-banking financial institution without –
 obtaining a certificate of registration; and
 having the net owned fund Rs. 2 crores (Rs 25 lacs – April, 1999)
 However, as per revised regulatory framework if a NBFC is having
NOF of less than Rs. 2 crores then such companies need to increase
the NOF in the following manner –
▫ Rs. 100 lakhs before April 1, 2016; and
▫ Rs. 200 lakhs before April 1, 2017
▫ Certain class of NBFCs regulated by other regulators are
exempted from the requirement of registration with RBI –
 Merchant Banking/ stock broking companies– SEBI;
 Insurance Companies – IRDA;
 Nidhi Companies – Act, 1956 or Act, 2013;
 Housing Finance Companies – NHB; etc..

8. Types of NBFCs

9. Types of NBFCs (1/2)
NBFCs
Liability
Deposit
accepting
Non-
Deposit
accepting
Size
Systemically
important
NBFCs
Non-
Systemically
important
NBFCs
Activity
Next Slide

10. Types of NBFCs (2/2)
Kind of Activities
Asset Finance Company (AFC)
Investment Company (IC)
Loan Company (LC)
Infrastructure Finance Company(IFC)
SI-Core Investment Company (CIC-ND-
SI)
Infrastructure Debt Fund (IDF)
Micro Finance Institution (NBFC-MFI)
Factors (NBFC-Factors)
Mortgage Guarantee Companies
Non-Operative Financial Holding
Company (NOFHC)

11. How to determine the type of
NBFCs (1/5)
• Asset Finance Company:
▫ financing of physical assets supporting productive/
economic activity.
 such as automobiles, tractors, generator sets, earth moving, etc.
 Eg. Magma Fincorp Limited, Srei Equipment Finance Limited
• Loan Company:
▫ Providing of finances, whether by making loans or advances
or otherwise for any other activities other than its own but
does not incl. AFC
 Eg. Fullerton India Credit Company Limited, India Infoline
Finance Limited
• Investment Company:
▫ carrying on as its principal business of acquisition of
securities
 Eg. Tata Investment Corporation Limited

12. • Infrastructure Finance Company:
▫ which deploys at least 75 per cent of its total assets in
infrastructure loans, has a minimum Net Owned Funds of Rs.
300 crore, has a minimum credit rating of „A „or equivalent and a
CRAR of 15%.
 Eg. L&T Infrastructure Finance Company Limited, IDFC Limited
• Infrastructure Debt Fund:
▫ IDF facilitate the flow of long term debt into infrastructure
projects;
▫ Can raise resources through issue of Rupee or Dollar
denominated bonds of minimum 5 year maturity
▫ Only IFC can sponsor IDF-NBFCs
 IDF can be set up either as a Trust or as a Company – If it is a trust
then it will be a Mutual Fund (regulated by SEBI) and if it is a
Company then it will be a Company (regulated by RBI)
 As on June 30, 2015 only 3 companies are registered with RBI i.e.
India Infradebt Limited, L&T Infra Debt Fund Limited, IDFC Infra
Debt Fund Limited
How to determine the type of
NBFCs (2/5)

13. • Systemically Important Core Investment Company:
▫ acquisition of shares and securities
 holds not less than 90% of its Total Assets
 investment in equity shares, preference shares, debt or loans in group
companies;
 investments in the equity shares (including instruments compulsorily
convertible into equity shares within a period not exceeding 10 years
from the date of issue) in group companies constitutes not less than 60%
of its Total Assets;
 does not trade in its investments in shares, debt or loans in group
companies except through block sale for the purpose of dilution or
disinvestment;
 does not carry on any other financial activity referred to in Section 45I(c)
and 45I(f) of the RBI act, 1934 except investment in bank deposits,
money market instruments, government securities, loans to and
investments in debt issuances of group companies or guarantees issued
on behalf of group companies.
 asset size is Rs 100 crore or above and
 accepts public funds
 Eg. Tata Capital Limited
How to determine the type of
NBFCs (3/5)

14. • Micro Finance Institution:
▫ ND-NBFC having not less than 85% of its assets in the nature of “qualifying
assets”
▫ Qualifying Assets means a loan which satisfy the following criteria:
 loan disbursed by an NBFC-MFI to a borrower with a rural household annual
income not exceeding Rs. 1,00,000 or urban and semi-urban household income not
exceeding Rs. 1,60,000;
 loan amount does not exceed Rs. 60,000 in the first cycle and Rs. 1,00,000 in
subsequent cycles;
 total indebtedness of the borrower does not exceed Rs. 1,00,000;
 tenure of the loan not to be less than 24 months for loan amount in excess of Rs.
15,000 with prepayment without penalty;
 loan to be extended without collateral;
 aggregate amount of loans, given for income generation, is not less than 50 per cent
of the total loans given by the MFIs;
 loan is repayable on weekly, fortnightly or monthly instalments at the choice of the
borrower
▫ Having a minimum NOF of Rs. 5 crores (except NBFCs registered in North
Eastern Region)
 Eg. SKS Microfinance Limited, Asmitha Microfin Limited
▫ NBFCs does not qualifying as MFI shall not extend loans to MF Sector in
aggregate exceeding 10% of the Total Assets.
How to determine the type of
NBFCs (4/5)

15. • Factors:
▫ Business of factoring
▫ financial assets - at least 50 percent of its total assets and its
income - should not be less than 50 percent of its gross income.
 SBI Global Factors Ltd., India Factoring & Finance Solutions Pvt Ltd
• Mortgage Guarantee Company:
▫ 90% of the business turnover is mortgage guarantee business or
at least 90% of the gross income is from mortgage guarantee
business and net owned fund is Rs.100 crore.
 India Mortgage Guarantee Corporation
• Non-Operative Financial Holding Company:
▫ promoter / promoter groups will be permitted to set up a new
bank.
▫ a wholly-owned NOFHC which will hold the bank as well as all
other financial services companies
How to determine the type of
NBFCs (5/5)

16. Some Important Concepts

17. Asset Classification
• Standard Assets:
▫ No default in repayment of principal or interest
• Sub-standard Assets:
▫ Asset been classified as Non-performing asset for a period of not exceeding 18
months
 Non-performing asset means an asset, term loan, demand/ call loan, bill – which
remained overdue for a period of 6 months or more;
 lease rental and hire purchase instalment, which has become overdue for a period
of 12 months or more
• Doubtful Assets:
▫ Asset remaining sub-standard for a period exceeding 18 months or such shorter
period
• Loss Assets:
▫ Identified by the Company/ external or internal auditor/ RBI
• For sub-standard assets and doubtful assets - period „not exceeding 18
months‟ stipulated in this sub-clause shall be „not exceeding 16 months‟
for the financial year ending March 31, 2016; „not exceeding 14 months‟
for the financial year ending March 31, 2017 and „not exceeding 12
months‟ for the financial year ending March 31, 2018 and thereafter”

18. Capital Risk Adequacy Ratio
(CRAR)
• NBFC-ND-SI, NBFC-D, NBFC-MFI, NBFC-IFC shall
maintain a minimum CRAR of 15 percent.
• CRAR = Tier I + Tier II Capital
Aggregate Risk Weighted Assets
• The total Tier I capital, at any point of time shall not be
less than 8.5 percent by March 31, 2016 and 10 percent
by March 31, 2017.
• The total Tier II Capital for NBFC-MFIs, at any point of
time, shall not exceed 100 percent of Tier I Capital.
• NBFCs primarily engaged in lending against gold
jewellery (such loans comprising 50 percent or more of
their financial assets) shall maintain a minimum Tier l
capital of 12 percent.

19. Tier I Capital
• “Tier I Capital” means owned fund as reduced by investment
in shares of other NBFC and in shares, debentures, bonds,
outstanding loans and advances including hire purchase and
lease finance made to and deposits with subsidiaries and
companies in the same group exceeding, in aggregate, ten per
cent of the owned fund; and perpetual debt instruments
issued by a non-deposit taking non-banking financial
company in each year to the extent it does not exceed 15% of
the aggregate Tier I Capital of such company as on March 31
of the previous accounting year;
▫ “owned fund” means paid up equity capital, preference shares
which are compulsorily convertible into equity, free reserves,
balance in share premium account and capital reserves
representing surplus arising out of sale proceeds of asset,
excluding reserves created by revaluation of asset, as reduced by
accumulated loss balance, book value of intangible assets and
deferred revenue expenditure, if any.

20. Tier II Capital
• “Tier II capital” includes the following:
▫ preference shares other than those which are compulsorily
convertible into equity;
▫ revaluation reserves at discounted rate of fifty five per cent;
▫ general provisions (including that for standard assets) and
loss reserves to the extent these are not attributable to
actual diminution in value or identifiable potential loss in
any specific asset and are available to meet unexpected
losses, to the extent of one and one fourth per cent of risk
weighted assets;
▫ hybrid debt capital instruments; and
▫ subordinated debt
▫ perpetual debt instruments issued by a non-deposit taking
non-banking financial company which is in excess of what
qualifies for Tier I Capital, to the extent the aggregate does
not exceed Tier I capital.

21. Risk Weighted Assets
• Degrees of credit risk expressed as percentage
weightages have been assigned to balance sheet assets in
the prudential norms.
▫ Eg. Cash and bank balance, FDs – 0
▫ Inter corporate loans/ deposits – 100
▫ Loans to Staff – 0
▫ Fixed Assets (net of depreciation) - 100
• Risk Weighted Assets = the value of each asset/ item X
the relevant risk weights
• For off-balance sheet items - the notional amount of the
transaction is converted into a credit equivalent amount
▫ credit equivalent amount X risk weight applicable.

22. Leverage Ratio
• Leverage ratio shall not be more than at 7 times at
any point of time, w.e.f 27th March, 2015
• Leverage Ratio = Total Outside Liabilities
Owned Funds
• “Outside Liabilities” means total liabilities as appearing on the
liabilities side of the balance sheet excluding 'paid up capital' and
'reserves and surplus', instruments compulsorily convertible into equity
shares within a period not exceeding 5 years from the date of issue but
including all forms of debt and obligations having the characteristics of
debt, whether created by issue of hybrid instruments or otherwise, and
value of guarantees issued, whether appearing on the balance sheet or
not.

23. Applicable Regulations

24. Regulations applicable to NBFCs
(1/2)
Regulations Applicability
Reserve Bank of India Act, 1934 All NBFCs
Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential
Norms (Reserve Bank) Directions, 2007
Deposit taking
NBFCs
Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank)
Directions, 1998
All NBFCs
Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding)
Companies Prudential Norms (Reserve Bank) Directions, 2015
NBFC- ND-SI
Non-Systemically Important Non-Banking Financial (Non-Deposit Accepting or
Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015
NBFC-ND-NSI
Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977 All NBFCs
Non-Banking Financial Companies – Corporate Governance (Reserve Bank)
Directions, 2015
All NBFCs
Miscellaneous Instructions to all Non-Banking Financial Companies All NBFCs
Miscellaneous Instructions to NBFC- ND-SI All NBFCs

25. Regulations Applicability
Non-Banking Financial Companies Auditor‟s Report (Reserve Bank) Directions,
2008
All NBFCs
Frauds –Future approach towards monitoring of frauds in NBFCs NBFC-D; NBFC-
ND-SI
Fair Practice Code All NBFCs
Know Your Customer' (KYC) Guidelines – Anti Money Laundering Standards (AML)
- 'Prevention of Money Laundering Act, 2002 - Obligations of NBFCs in terms of
Rules notified thereunder
All NBFCs
Returns to be submitted by NBFCs All NBFCs
Raising Money through Private Placement by NBFCs – Non-Convertible Debentures
ets.
All NBFCs
Rounding off transactions to the Nearest Rupee by NBFCs All NBFCs
Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair
Recovery for Lenders: Framework for Revitalizing Distressed Assets in the Economy
All NBFCs
Requirement for Obtaining Prior Approval of RBI in Cases of Acquisition / Transfer
of Control of NBFCs
All NBFCs
Regulations applicable to NBFCs
(2/2)