NBFC Prudential Norms & Compliances – Important Aspects

1 Bombay Chartered Accountants SocietyCA Bhavesh Vora 04/08/2016 NBFC Prudential Norms & Compliances Important AspectsCoverage04/08/2016 BCAS -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 RatioCoverage (Contd.)04/08/2016 BCAS -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 SectorFinancial SystemFinancial Assets/ InstrumentsFinancial MarketsFinancial IntermediariesCapital MarketMoney MarketCredit MarketPrimary MarketSecondary MarketMoney Market InstrumentCapital Market InstrumentHybrid InstrumentForexMarketBCAS -CA Bhavesh Vora404/08/2016 Companies(Registered under Section 2(20))

2 Of the Companies Act 2013)NBFC Regulated by Other RegulatorsNon Banking Non Financial CompaniesRegulation, Supervision,Surveillance under the Companies Act :Ministry of Corporate Affairs (MCA)Enforcement Agency : State GovernmentsNBFCs Registered with RBI *Regulation,Supervision,Surveillance & Enforcement under RBIT ypeof Financial InstitutionsAuthority for Regulation,Supervision. Surveillance & EnforcementHousing Financial Housing BankMerchant Banking Co,Venture Cap Fund Co,Stock Broking,CISSEBIN idhiCompanies,Mutual Benefit CoMCAChit Fund CompaniesState CompaniesIRDA04/08/2016 BCAS -CA Bhavesh Vora5 Existence of NBFCs04/08/2016 BCAS -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.

3 Decade of NBFC04/08/2016 BCAS -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 SectoralImportanceBanks Vs. Non-Banks04/08/2016 BCAS -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 MechanismMeaning of NBFC04/08/2016 BCAS -CA Bhavesh Vora9As per Section 45-I(f) of the RBI Act, 1934 Non Banking Financial Company means A Financial Institution which is a Company.

4 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 acompany, corporation or co-operative societyMajor Changes in 2007-0804/08/2016 BCAS -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)04/08/2016 BCAS -CA Bhavesh Vora11 Newprudentialnormsandrevampofolddirectio nsrelatedtoSIandNon-SINBFC sbasedonregulatoryframeworkissuedinNovem ber2014(27thMarch,2015)

5 SystemicallyImportantNBFC(Non-DepositAcc eptingorHolding)CompaniesPrudentialNorms ,2015 Non-SystemicallyImportantNBFC(Non-Deposi tAcceptingorHolding)CompaniesPrudentialN orms,2015 Corporategovernancedirections2015introdu ced(10thApril,2015) MasterCirculardated03rdJune2015and11thJu ne2015onprudentialnormsforNon-Systemical lyandSystemicallyImportantNBFC srespectively. ExemptiontospecifiedNBFC sfromCreditConcentrationNormsVery Recent Developments (Contd.)04/08/2016 BCAS -CA Bhavesh Vora12 ClassificationofNBFC sintoType-I(NoPublicFundsandCustomerInte rface)andType-II(PublicFundsandCustomerI nterface) SubmissionofApplicationatCentralOffice KYCD irections,2016 Public Funds Vs.

6 Public Deposits04/08/2016 BCAS -CA Bhavesh Vora13 Public Funds include funds raised directly or indirectly through: Public Deposits Commercial Papers Debentures Inter-Corporate Deposits Bank FinanceAnd exclude: Funds raised by issue of compulsory convertible instruments within a period not exceeding five years from the date of issuePublic FundsPublic DepositsSystemically and Non- systemically ND-NBFCs04/08/2016 BCAS -CA Bhavesh Vora14 Relevance of Last Audited Balance Sheet NOF for NBFCs Rs. 200 Lakhs (Registered/Applied after 20thApril 1999) Rs. 100 Lakhs by 31stMarch 2016 Rs. 200 Lakhs by 31stMarch 2017 Asset Size of the Group Companies to be clubbedParticularsNon-SystemicallyImport antSystemicallyImportantAsset SizeLess than Rs.

7 500 croresRs. 500 croresand AboveNot AccessingPublic fundsExempt fromobserving Prudential Norms , 2015 (Except Annual Certificate)Exempt from Credit Concentration NormsApplicability04/08/2016 BCAS -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 AssetsFinancial Assets are more than 50% of Total Assets (Net of Intangible Assets)Financial Income is more than 50% of Total Income (Gross)ANDI ssues experienced04/08/2016 BCAS -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 NormsApplicability of Prudential Norms04/08/2016 BCAS -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)

8 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 Recognition04/08/2016 BCAS -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 dueAccounting04/08/2016 BCAS -CA Bhavesh Vora19 Accounting Standards (AS)

9 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 ValueAsset Classification04/08/2016 BCAS -CA Bhavesh Vora20 Every NBFC has to classify its lease/hire purchaseassets, loans and advances and any other forms ofcredit into: Standard Assets Sub-Standard Assets Doubtful Assets Loss AssetsThe Class of Assets cannot be upgraded merelyupon rescheduling (Unless it satisfies conditionsfor upgradation)Provisioning Requirements04/08/2016 BCAS -CA Bhavesh Vora21 The NBFCs are to provide for the assets classified in thefollowing manner.

10 Standard Assets (For NSI) ( )(For SI and NBFC-D) Disclosed as Contingent Provisions against Standard Assets Sub-Standard Asset 10% Doubtful Assets (Secured Portion) Uptoone year 20% One to three years 30% More than three years 50% Doubtful Assets (Unsecured Portion) 100% Loss Assets 100%Additional Provisioning04/08/2016 BCAS -CA Bhavesh Vora22 Additional Provisioning is required for Hire Purchase and Lease Assets (On net book value) HC/LR overdue upto12 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 Adequacy04/08/2016 BCAS -CA Bhavesh Vora23 ParticularsNBFC-ND-SINBFC-ND-NSINBFC-DCa pitalRatio to Risk-weighted/Adjusted Ratio Limit15%15%(Only forMFI and IFC)15%TierII to Tier I Capital Ratio Limit100%(Only for MFI)