RBI Tightens NBFC Regulations

India’s central bank, the Reserve Bank of India has tightened the regulatory framework for non-banking finance companies (NBFCs). Like banks, they will be subject to 90-day overdue norms for identification of bad loans, will be required to make higher provisioning for non-standard assets and have to put in place ‘fit and proper criteria’ for directors.

The revised regulatory framework for NBFCs is aimed at addressing regulatory gaps and arbitrage arising from differential regulations, both within the non-banking finance sector as well as in relation to other financial institutions.

With the unveiling of the framework, the process of issuing Certificate of Registration (CoR), which was kept in abeyance for the last six months or so for conducting NBFC business, will start once again.

Given the need for strengthening the financial sector and technology adoption, and in view of the increasing complexities of services offered by NBFCs, the RBI said it will be mandatory for all NBFCs to attain a minimum net owned fund (NOF) of 2 crore by the end of March 2017.

The limit for acceptance of deposits across the NBFC sector has been harmonised by reducing the same for rated asset finance companies from four times to 1.5 times of NOF, with immediate effect.

Hitherto, an unrated AFC having NOF of 25 lakh, complying with all the prudential norms and maintaining capital adequacy ratio of not less than 15 per cent, was allowed to accept or renew public deposits not exceeding one-and-a-half times its NOF or up to ₹10 crore, whichever is lower.

Further, AFCs which are rated and complying with all the prudential regulations were allowed to accept deposits up to four times their NOF.

The RBI pointed out that systemic risks posed by NBFCs functioning exclusively out of their own funds and NBFCs accessing public funds cannot be equated and hence cannot be subjected to the same level of regulation.