The Reserve Bank of India (RBI) has notified new norms for regulation of non-banking financial companies (NBFCs), tightening rules related to minimum net owned funds, deposit acceptance ratio, capital norms, asset classification rules, corporate governance and more.
As India plans to expand its credit channels, the central bank's task becomes difficult as it tries to deepen the financial markets by reducing the dependence on banks and ensuring that sources of credit remain stable.
The NBFC sector has been gaining importance as the share of NBFCs has grown from 10.7 per cent of the banking assets in 2009 to 14.3 per cent in 2014.
Given the rising share of NBFCs in the Indian industry, RBI had revised the framework for regulating them in November 2014. This has now come into effect.
As per the revised norms, NBFCs in operation before April 1999 are to raise their minimum net owned funds (NOF) to Rs 1 crore by March 2016 and further to Rs 2 crore by March 2017 from Rs 25 lakh currently or risk cancellation of their permits.
NBFCs are now required to mark a loan as bad debt if the interest has not been paid for 90 days or three months. Till now, NBFCs marked a loan as bad loan only if the interest was not paid for six months while for banks it was three months. Provisions for standard assets have also been raised from 0.25 per cent of the loans outstanding to 0.40 per cent of loans.
For deposit-taking NBFCs, the revised norms have made it mandatory to get an investment grade rating by March 2016 or stop accepting deposits.
Moreover, till March 2016, the unrated asset finance companies which are sub-investment grade can only renew deposits on maturity and not accept fresh deposits till they get an investment-grade rating. All asset financing NBFCs are now allowed to accept deposits up to 1.5 times their net owned funds, down from four times their net owned funds earlier.
Previously, non-deposit taking NBFCs with assets over Rs 100 crore were considered systemically important, but this cut-off has now been increased to Rs 500 crore “in light of the overall increase of growth of the NBFC sector.”
RBI has also asked all non-deposit taking NBFCs with an asset size of Rs 500 crore to streamline the core capital adequacy ratio of 10 per cent, compared with a range of 7.5 per cent to 12 per cent at present. NBFCs have been given time till March 2017 to comply with the norms.
RBI said that an NBFC registering as NBFC-Factor is required to ensure that its financial assets in the factoring business constitute at least 50 per cent of its total assets and its income derived from the factoring business is not less than 50 per cent of its gross income. This was 75 per cent earlier.
(Edited by Joby Puthuparampil Johnson)