Non Banking Finance
Company
ICAI-DELHI
04-05-2013
CA Bhavesh Vora
1
Topics Covered
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Meaning of NBFC
Classification of NBFCs
Types of NBFCs
Net Owned Funds requirement
Capital Adequacy Requirement
Concentration of Credits/Investments
Prudential Norms – NPA Provisioning
Requirements
04-05-2013
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CA Bhavesh Vora
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Topics Covered
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Other Important Norms
Auditor’s Report Directions, 2008
Returns Requirements
Core Investment Companies (CICs)
Formation Procedure
Recent Amendments
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Banks Vs. Non-Banks
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Both are Financial Intermediaries
Banks Can:
Maintain Demand Deposits (savings/current
Accounts)
 Form a Part of Payment and Settlement Mechanism
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Non-banks Can
Accept only term Deposits
 Does not form Part of Payment and Settlement
Mechanism
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Meaning of NBFC
Section 45I (f) of RBI act, 1934
“Non-banking financial company” means –
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a “Financial Institution” which is a company;
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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;
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such other Non-Banking Institution or class of such
institutions, as RBI specifies
“Non-Banking Institution” - means a
company , corporation or co-operative society
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CA Bhavesh Vora
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Classification of NBFCs
Mainly there are following types of NBFCs
Asset Finance Company
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Equipment Leasing
Hire Purchase Finance
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Investment Company
Loan Company
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Core Investment Companies
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Infrastructure Finance Companies
Factor
Micro Finance Institutions
Infrastructure Debt Funds
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Classification of NBFCs
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Asset Finance Company (AFC) would be defined as
any company which is a financial institution carrying
on as its principal business the financing of physical
assets supporting productive / economic activity.
Principal business - aggregate of financing real/physical assets supporting
economic activity and income arising therefrom is not less than 60% of
its total assets and total income respectively

The onus of including only eligible assets for the
purpose of classification as AFC shall be that of the
company concerned.
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Classification of NBFCs……
Investment Companies (IC) means any company which is
a financial institution carrying on as its principal business
of acquisition of securities
Loan Companies (LC) means any company which is a
financial institution carrying on as its principal business the
providing of finance whether by making loans or advances
or otherwise for any activity other than its own but does
not include an Asset Finance Company
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CA Bhavesh Vora
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Types of NBFCs
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Deposit accepting NBFCs.
Non deposit Accepting NBFCs
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Systemically important (SI)
Not systemically important NBFCs
‘NBFC-ND-SI', means an NBFC not accepting / not holding
Public Deposits and having total assets of Rs 100 crore
and above as shown in the last audited balance sheet.
NOF to be maintained at Rs. 200 lacs at all the time
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Capital Adequacy
Capital to risk assets ratio (CRAR) in case of
NBFC-ND-SI shall not be less than 15%
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Steps for calculation of CRAR
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Step I
Step II
Step III
Step IV
– Find out owned funds
– From Owned fund, derive Net
owned fund (Tier I Capital)
– Find Tier II capital
– Derive Total Risk Weighted
Assets (TRWA)
CRAR = (Tier I+Tier II)/TRWA
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TRWA = Total Risk weighted assets of B/S and Off balance
sheet items
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Maintenance of CRAR
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CRAR (Capital to Risk Asset Ratio)
Capital in the form of Tier I and Tier II capital to be maintained
against total risk weighted assets.
Calculation of Tier I Capital (i.e. Net owned funds)
Sum of
 Share Capital (Paid up capital + Preference shares which are
compulsorily convertible into equity)
 Free
Reserves (Including General Reserves, Debenture
redemption reserves, Capital Redemption Reserves, Credit
balance in P&L Account, Other Free reserves (to be specified))
 Capital reserves representing surplus arising out of sale proceeds
of asset + Balance in share premium account
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Calculation of CRAR…
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Deduct from above
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Deferred Revenue Expenditure
Reserves created by revaluation of assets
Accumulated loss balance
Losses in the current period and those brought forward from
previous periods
Book value of Intangible assets
Deferred Tax Asset
The Resultant Figure will be “Owned Funds”
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Calculation of CRAR…
Further deduct from the “Owned Funds”…
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Investments in shares of other NBFCs, Investments in shares,
debentures, bonds, outstanding loans and advances including
hire purchase and lease finance made to and deposits with
subsidiaries and companies from the same group exceeding, in
aggregate, 10% of the owned fund
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Perpetual debt instruments issued by a NBFC-ND-SI to the
extent not exceeding 15% of the aggregate Tier I capital - as on
31st March of Previous Accounting Year
The result is Tier I capital (Net Owned Fund)
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Calculation of CRAR…
Calculation of Tier II capital (Aggregate of Below items)
 Preference shares other than those which are
compulsorily convertible into equity
 Revaluation Reserves (RR) - 45% is only taken in
calculation of tier II capital
 General Provisions 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 (1.25) percent of risk weighted
assets. (Include provisions on standard assets)
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Calculation of CRAR…
Cont…
 Hybrid Debt Capital Instruments
 Perpetual debt instruments issued by a SI-ND
NBFC which is in excess of what qualifies for Tier I
Capital
 Subordinated Debts
Result is Tier II capital
Tier II cannot be greater than
Tier I capital for calculation of capital adequacy
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Calculation of Risk Assets
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Weights assigned as below
Asset
Weight
Amount
Fixed Assets
100
500
Weighted
Amt
500
Bonds of Public Sector
Banks
Investment in PDI of
NBFCs
Shares/Debenture/CP
s/Bonds
20
500
100
100/0
500
500
100
500
500
0
20
0
Cash and Bank
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Calculation of Risk Assets
Asset
Weight
Amount
Weighted
Amt
500
Stock on Hire
100
500
Inter Corporate
Loans/Deposits
Loans to staff
100
500
500
0
50
0
Other Secured
loans and Adv
100
200
200
Total
2800
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CA Bhavesh Vora
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Risk Weights for Off Balance sheet
items
Conversion Factor (Weights) are assigned for off balance sheet
items as follows
Financial and other guarantees, partly paid shares /debentures,
bills discounted /rediscounted /Lease contracts entered into
but yet to be executed
100%
Shares/Debentures underwriting obligations & Other
Contingent Liabilities (To be specified in the calculation)
50%
Cash margins/deposits shall be
deducted before applying the conversion factor.
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Important Notes for CRAR
Calculation
(1) Netting may be done only in respect of assets where provisions
for depreciation or for bad and doubtful debts have been made.
(2) Can net off the amount of cash margin/caution money/security
deposits (against which right to set-off is available) held as
collateral against the advances out of the total outstanding
exposure of the borrower.
Assets which have been deducted from owned
fund to arrive at net owned fund shall have
a weightage of ‘zero’
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Important Notes for CRAR
Calculation…..
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Revised Capital Adequacy Framework for
Off-Balance Sheet Items for NBFCs has been
announced by RBI which needs to be adhered
to while calculating off balance sheet exposure
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 by April
01, 2014
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Concentration of Credit/Investment
(NBFC-D and NBFC-ND-SI)
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To formulate a policy in respect of exposure to a
single party/a single group of parties
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Not to lend –
(a) to any single borrower exceeding 15% of its
owned funds and (b) to any single group of
borrowers exceeding 25% of its owned funds
Not to Invest in (a) the shares of another company exceeding 15%
of its owned funds (b) the shares of single group
of companies exceeding 25% of its owned fund
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CA Bhavesh Vora
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Concentration of Credit/Investment
(NBFC-D and NBFC-ND-SI)
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Not to lend and Invest (loans and investments
taken together) exceeding
(a) 25% of its owned fund to a single party and
(b) 40% of its owned fund to a single group of parties
Note: Any systemically important non-deposit taking nonbanking financial company not accessing public funds, either
directly or indirectly, or not issuing guarantees may make an
application to the Bank for an appropriate dispensation
consistent with the spirit of the exposure limits.
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Provisioning Norms
Classification of Assets
 Standard Assets
 Interest and Principal Repayment
are regular
 Sub-standard assets
 Doubtful Assets
 Loss Assets
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Provisioning Norms…
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Standard Assets
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Sub standard assets
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0.25% of standard assets (Notification dated 17th January, 2011)
Non performing assets for a period of 18 months. Renegotiated loans
upto one year of satisfactory performance of new terms.
Provide 10% on the outstanding amount
No specific provisions regarding Security
Doubtful Assets
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Remains sub standard asset for period of 18 months and above
Provide 100% of uncovered outstanding amount
To the extent of unsecured loan which is covered by value of realizable
securities, the provisioning required based on the period the asset has
remained doubtful
i. upto one year - 20%, ii. one to three year - 30%, iii. more than three
years - 50%
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Provisioning Norms…
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Loss Assets
Identified by the Company, its Auditors or RBI
(Period is not specified) or
 Potential threat of Non Recoverability due to
erosion in the value of securities or non availability
of security or any fraudulent act or omission on the
part of the borrower
 100% Write off in the books
(Same treatment for the Interest)
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Other Important Norms..
(All NBFCs)
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Certain disclosures should be made in the Balance sheet as per
format prescribed
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Disclosure in balance sheet only for NBFC-ND-SI
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Provisions for bad and doubtful debts
Provisions for depreciation in investments
Capital to Risk asset ratio (CRAR)
Exposure to real estate sector, both direct and indirect and
Maturity pattern of assets and liabilities
For all NBFCs - Transfer of 20% profit to Special Reserves (RBI
Act)
Schedule to be appended to the balance sheet in notes to
accounts (Format is prescribed)
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Other Important Norms..
(All NBFCs)
Submission of certificate from statutory auditors
 Certificate at the end of FY certifying the eligibility of
the company to hold Certificate of Registration as
NBFC
 Certificate to indicate asset and income pattern
 To be given within one month from the finalisation of
the balance sheet not later than 30th Dec. in any case
"Every non-banking financial company
shall finalise its balance sheet within a period of
3 months from the date to which it pertains"
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Asset Income Pattern
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In order to identify a particular company as an NBFC,
consider both, the assets and the income pattern from the last audited balance sheet to decide
principal business.
Financial Assets are more than 50 per cent
of its Total Assets (netted off by Intangible Assets)
AND
Income from financial assets should be
more than 50 per cent of the gross income
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Fixed Deposits with Banks are not considered as
Financial Assets (RBI Notification no. 259)
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For Attention of Auditors:
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Auditor’s Report :
Auditors to submit additional Report to the
Board of Directors
The auditor shall also make a separate report to
the Board of Directors of the Company
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Auditor’s Report…
Matters to be included in the auditor’s report
The auditor’s report (Issued to Directors) on the
accounts of a NBFC shall include a statement on the
following matters, namely:
In the case of all non-banking financial
companies
I. Whether the company is engaged in the business of
NBFI and whether it has obtained a Certificate of
Registration (CoR) from the Bank
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Auditor’s Report…
II. In the case of a company holding CoR issued by the
Bank, whether that company is entitled to continue to
hold such CoR in terms of its asset/income pattern as
on March 31st of the applicable year.
III. If the company is classified as AFC, Whether the
NBFC has been correctly classified as AFC as defined
in RBI Directions with reference to the business
carried on by it during the applicable financial year.
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Auditor’s Report…
In the case of an NBFC-ND
The auditor shall include a statement on: i.
ii.
iii.
Whether the Board of Directors has passed a
resolution for non- acceptance of any public
deposits.
Whether the company has accepted any public
deposits during the relevant period/year;
Compliance with the prudential norms
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Auditor’s Report…
Additional Reporting in respect of NBFC-ND-SI
(a) Calculation and compliance with Capital
adequacy requirements
(b) Whether annual statement of capital funds, risk
assets/exposures and risk asset ratio (NBS-7) was
furnished to the bank within the stipulated period
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Auditor’s Report…
Other Requirements:
1.
Reasons to be stated for unfavourable or
qualified statements
2.
Obligation of auditor to submit an exception
report to the Bank (RBI)
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Auditor to make a report to the regional office
containing the details of unfavorable or qualified
statements and about the non-compliance, as the
case may be, in respect of the company
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Returns Requirements
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For NBFC-ND-SI (Apart from returns applicable to all
NBFCs of any asset size)
 Monthly Return on Financial Parameters
 Monthly NBS-ALM-1 for Short Term Dynamic
Liquidity
 Half Yearly NBS-ALM-2 for Structural Liquidity, NBSALM-3 for Interest Rate Sensitivity
 NBS – 7 Quarterly return on Capital Funds, Risk Assets
 Monthly Reporting if Raised short term foreign currency
borrowings
 Fraud Reporting – as and when detected FMR I and
Quarterly in FMR II, III for Fraud outstanding, Progress
report respectively
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Returns Requirements.cont…
Quarterly return on important financial
parameters for NBFC having asset size between
50-100 crores
Note: Above is indicative list of important returns
and the same is not exhaustive, one has to see the
detailed list based on the asset size and type of the
NBFC.
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Core Investment Companies (CICs)
What is CICs?:
(i) Holds not less than 90% of Net Assets in group companies;
(ii) Investments in equity shares in group companies constitutes not
less than 60% of its Net Assets; (Net asset defined in Directions)
(iii) It does not trade in its investments except through block sale
for the purpose of dilution or disinvestment;
(iv) It does not carry on any other financial activity except some
specified acts
CIC is considered SI only if raising/holding public funds
AND Total Assets of Rs. 100 crore or above
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Core Investment Companies (CICs)
For CIC-ND-SI
 Capital Requirements:
minimum capital ratio. i.e.
Adjusted net worth at all time shall not be less than 30%
of its aggregate Risk Weighted Assets and Risk adjusted
value of off balance sheet as at the last balance sheet date
 Leverage Ratio: Outside liabilities at all times shall not
exceed 2.5 times its Adjusted Networth as on the date if
the last audited balance sheet
Exemptions Given: (i) CIC-ND-SI are exempted from para 15, 16
and 18 of the NBFC Norms, 2007 and ii) Norms 2007 not apply
for CIC-NDs (Other than systemically important)
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Core Investment Companies (CICs)
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RBI has Announced Core Investment Companies Overseas Investment (Reserve Bank) Directions, 2012
for CICs making investments abroad, opening
branches, representative offices, undertaking joint
ventures, etc. abroad. The same needs to be followed.
RBI has also separately issued guidelines for entry of
Core Investment Companies in insurance sector
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Formation Procedure
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A company with main object clause/ancillary clause for
carrying out NBFI activities (check object clause)
Obtain checklist of requirements from RBI website
Fill up prescribed form, available on RBI website,
according to instructions with the requirements
Fill up the e-form provided in excel format
Get the required certifications of the statutory
auditors/chartered accountants (as the case may be)
Submit softcopy on RBI website before submission of
the hard copy.
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Formation Procedure…Cont
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Obtain the printout of successful submission of the
softcopy. Mention the date of submission on the print if
date is not appearing on print.
Submit the hardcopy application in duplicate to regional
office of RBI
Each page in the application file should be numbered
Prepare the application in triplicate so that a replica is
with the applicant for future reference.
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Recent Amendments
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NBFCs need to display grievance redressal
mechanism and contact details of grievance
redressal officer at prominent place in
offices/branches/places of business
Fair Practices Code (which should preferably in
the vernacular language as understood by the
borrower) based on the guidelines announced
should be put in place by all NBFCs with the
approval of their Boards
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Recent Amendments…cont…
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Revision in format for submission of returns for
PMLA compliances and Uploading of Reports
in 'Test Mode' on FINnet Gateway for PMLA
Reporting
Facility to NBFC-ND-SI - Direct Access to
Negotiated Dealing System-Order Matching
Change in Loan to Value ratio for companies
predominantly in loan against gold products
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Recent Amendments…cont…
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Amendments to definition of infrastructure loan
NBFCs cannot become partners in partnership
firms
Review of Guidelines on entry of NBFCs into
Insurance Business
RBI
issued
“NBFC
(Opening
of
Branch/Subsidiary/Joint Venture/Representative
Office or Undertaking Investment Abroad by
NBFCs) Directions, 2011”
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Recent Amendments…cont…
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Guidelines for Credit Default Swaps - NBFCs as
users
Revision in External Commercial Borrowings
(ECB) Policy – Infrastructure
Finance
Companies (IFCs)
Guidelines on classification of frauds, approach
towards monitoring of and reporting system for
frauds for deposit taking NBFCs to apply for
NBFC-ND-SI also.
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Non Banking Finance
Company
ICAI-DELHI
04-05-2013
CA Bhavesh Vora
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