NBFCs are non-banking financial companies that are registered under the Companies Act and engage in financial activities such as lending, acquisition of shares/bonds, leasing, insurance, etc. but do not include institutions conducting agricultural/industrial activities or selling goods/services. NBFCs are regulated by the Reserve Bank of India and must register with RBI to operate. They are classified based on whether they accept public deposits and their asset size. Over time, various committees have shaped the regulatory framework for NBFCs in India to strengthen governance, disclosure, and supervision.

1. NBFC – Overview, Regulatory Framework,
and Compliances
CS ANSHU AGARWAL & CS SAJITA NAIR
Disclaimer: The views and opinions expressed in this presentation are our own views and do not
necessarily represent views of any organization(s) to which we belong.

2. Scope of presentation
What is
NBFC
Historical
background
Various types of
NBFCs
Classification of
NBFCs
Role of RBI Registration
Special
treatment to
NBFCs under CA
2013
Regulatory
Framework
Key prudential
regulations
Corporate
Governance
norms
Fair Practice
Code
Asset Liability
Management
System
Fraud Reporting
Auditors
reporting
requirement
Regulatory
Framework
IT Framework
Outsourcing
Policy
Various policies
to be framed
Various officials
to be appointed
Acquisition /
Transfer of
control of NBFCs
Ombudsman
Scheme
Various returns
to be filed
Core
Investment
Company

3. Historical Background of NBFCs in India
3
 NBFCs as an industry has been there for several decades in the Indian financial system
 With the growth in the number and size of NBFCs, various committees were formed in India to review the existing framework and address the shortcomings in the overall NBFC structure
 Key Committees that played a role in shaping the NBFC regulatory system are as follows:
Name of the Committee Key Reforms suggested
James Raj Committee (1974) Ban on prize chit and other schemes
Chakravarty Committee (1984) Made several recommendations for the development of money market
Vaghul Committee-(1987) Measures to widen and deepen the money market
Narasimhan Committee- (1991) Compulsory registration with RBI of all NBFCs
Dr. A.C. Shah Committee- (1992)
Bringing reforms in NBFC sector like prescription of prudential norms for NBFCs on the lines of banks, stipulation of credit rating for
acceptance of public deposits and more statutory powers to the RBI for better regulation of NBFCs.
Khanna Committee- (1995) Comprehensive and effective supervisory framework for NBFC
Vasudev Committee- (1998) Entry norms, prudential norms, issues concerning unincorporated bodies
Usha Thorat Committee
(2010-12)
Close regulatory gap between banks and NBFCs
Strengthen governance, disclosure and supervision .
New draft guidelines for NBFCs were released based on the recommendations
KUB Rao Committee
(2012-2013)
Recommendations on issues related to gold loan and loan NBFCs in India during 2013.
Nachiket Mor Committee
(2013-2014)
Convergence of certain regulatory aspects between banks and NBFCs based on the principle of neutrality.

4. What is NBFC
4
A company • A Non-Banking Financial Company (NBFC) is a company registered under the
Companies Act (defined u/s 45I (f) of RBI Act)
does not include
• any institution whose principal business is that of agriculture activity,
• industrial activity, purchase or sale of any goods (other than securities)
• or providing any services and sale/purchase/construction of immovable property.
engaged into
(section 45I(c) of
RBI
• Making loans and advances,
• Acquisition of shares, stock, bonds, debentures, securities issued by Government,
local authorities or other marketable securities etc
• Leasing / delivering of goods to hirer under Hire Purchase Agreement
• Carrying on any class of insurance business.
• Chit business or accepting public deposits under any Scheme / Arrangement.

5. Requirement of registration as NBFC
No NBFC shall commence or carry on business of non-banking
financial institution without:
• Obtaining Certificate of Registration from RBI; and
• Having a Minimum Net Owned Fund of Rs. 2 crore
A company also needs to register as NBFC with RBI, if it fulfils the
50:50 test: ( RBI circular dated October 19, 2006) (ref in CARO report)
• financial assets constitute more than 50 percent of the total assets (netted off
intangible assets) and
• income from financial assets constitute more than 50 percent of its gross income.

6. Registration
Exemptions: To avoid dual regulation, certain categories of NBFCs
which are regulated by other regulators are exempted from the
requirement of registration with RBI as NBFC
• Venture Capital Fund/ Merchant Banking companies/ Stock broking companies
registered with SEBI
• Insurance Company holding a valid Certificate of Registration issued by IRDA
• Nidhi companies as notified under Section 406 of the Companies Act, 2013
• Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982
• Housing Finance Companies regulated by National Housing Bank

7. NBFCs- Types
Classification on the basis of liability
• NBFCs are broadly categorized into two categories as below:
• NBFCs accepting public deposits (NBFCs – D); and
• NBFCs not accepting/holding public deposits (NBFCs – ND)
• Further, non-deposit taking NBFCs are categorized by their size into systemically
important and non- systemically important as NBFC-ND-SI and NBFC-ND.
Determination of NBFC – ND – SI:
• All NBFCs – ND whose asset size is Rs. 500 Crore or above are considered as
Systemically Important NBFC (NBFC-ND-SI).

8. NBFC- Classification based on liability
NBFC
Not Accepting
Deposits
Non-Systemic
Significance i.e
Asset < 500 crore
NBFC-ND
Systemic
Significance i.e
Assets>= 500 crore
NBFC-ND-SI
Accepting Public
Deposits
NBFC-D

9. Determination of NBFC – ND – SI
Once an NBFC reaches asset size of Rs 500 crore or above, it shall be treated
as NBFC-ND-SI despite not having such assets as on the date of last balance
sheet because Asset size of a company can fall below Rs 500 crore in a given
month, due to temporary fluctuations and not due to actual downsizing.
Such NBFC are required to comply with provisions as applicable to NBFC-ND-
SI, till submission of its next audited balance sheet to the RBI and a specific
dispensation from RBI is sought.

10. Multiple NBFCs in a Group
NBFCs that are part of a corporate group or are floated by a common set of promoters, shall not be
viewed on a standalone basis.
The total assets of the NBFCs in a group including deposit taking NBFCs, if any, shall be aggregated to
determine if such consolidation falls within the asset sizes of the two categories i.e. those with asset
size of below Rs. 500 Crore and those with asset size of Rs. 500 crore and above.
Regulations as applicable to the two categories shall be applicable to each of the non-deposit taking NBFC
within the group.

11. Meaning of term ‘Systemic’
Systemic describes something inherent or deeply engrained in the
system. It describes something that is affecting a system, such as a
body or society as a whole. Something that affects an entire system.
NBFCs above certain threshold limits have a bearing on the financial
stability of the overall economy and hence classified as NBFC-
Systemic.

12. NBFCs Classifications
Type Description
Asset Finance Company (AFC)
• financial institution carrying on as its principal business the financing of physical assets supporting
productive/economic activity, such as automobiles, tractors, etc
Investment Company (IC) • financial institution whose principal business is acquisition of securities.
Loan Company (LC)
• 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
AFC.
Infrastructure Finance Company
(IFC)
• NBFC which deploys at least 75 per cent of its total assets in infrastructure loans
NBFC Account Aggregator
• to provide information to the customer about the various products he has (like
insurance, mutual funds etc) in a common format in a consolidated, organised and
retrievable manner

13. NBFCs Classifications
Type Description
Systemically Important Core
Investment Company (CIC-ND-SI):
• NBFC carrying on the business of acquisition of shares and securities and holds 90% or more of its
Total Assets as investments in group companies;
Infrastructure Debt Fund:
Non- Banking Financial Company
(IDF-NBFC)
• IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debt into
infrastructure projects.
Non-Banking Financial Company –
Factors (NBFC-Factors)
• non-deposit taking NBFC engaged in the principal business of factoring.
Non-Banking Financial Company –
Micro Finance Institutions (NBFC-
MFIs)
• MFI-NBFC is a company registered as NBFC offering credit to economically disadvantaged groups
as well support Micro, Small and Medium Enterprises (MSMEs)

14. NBFCs Classifications
Type Description
NBFC- Non-Operative Financial
Holding Company (NOFHC)
is financial institution through which promoter / promoter groups are permitted to set up a new
bank. It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will hold the
bank as well as all other financial services companies regulated by RBI or other financial sector
regulators, to the extent permissible under the applicable regulatory prescriptions
Mortgage Guarantee Company
MGC is a type of NBFC which primarily transacts the business of providing guarantee for repayment
of an outstanding housing loan and interest accrued thereon upto the guaranteed amount

15. Difference between NBFCs and Banks
NBFCs perform functions similar to that of banks
but there are a few differences-
• NBFCs cannot accept Demand Deposits;
• NBFCs do not form part of the payment and settlement system
and cannot issue Cheques drawn on itself; and
• Deposit insurance facility of the Deposit Insurance and Credit
Guarantee Corporation is not available for NBFC depositors, unlike
in case of banks.

16. NBFCs recognised as QIBs
RBI registered systemically important
NBFCs have been given the status of QIBs.
• Reservation for QIBs in IPOs
• Eligibility to take part in QIPs
• Eligibility for firm allotment under Anchor investor
portion in the IPO

17. Special treatment to NBFCs under
Companies Act, 2013
Section 45I(c) of RBI Act, NBFCs are defined as Financial Institution.
Section 2(39) of Companies Act, 2013 ―financial institution includes a scheduled bank, and
any other financial institution defined or notified under the Reserve Bank of India Act, 1934
Section 36- Liable for fraud u/s 447 for giving any false statement or concealing any material
fact in any agreement for obtaining credit facilities from any Bank or financial institution.
Section 3: OPC can not carry out Non-Banking Financial Investment activities
Section 71 : Unlike other Companies which necessarily have to create charge on specific
moveable property as a security for Debentures, NBFC are allowed to create charge on any
moveable property.
Section 73 – Prohibition on acceptance of public deposit from public not applicable to NBFCs

18. Special treatment to NBFCs under
Companies Act, 2013
Section 137 : NBFC are exempted from filing of financial statement with MCA in XBRL mode
Section 185-Not applicable for NBFCs engaged in the business of giving loan
Section 186(1)-NBFCs would fall in category of Investment Company as per newly defined
definition of Investment Company under Section 186
Section 186(2)-NBFCs are exempt from compliance of Section 186
Section 2(87)- Systemic NBFCs are exempted from the restrictions of minimum no of layers

19. Exclusion of NBFCs from IBC code
Corporate Person definition excludes any financial service provider
Financial service definition lists out 9 categories of financial services but is an
inclusive definition
Whether NBFCs which are providing any financial services which are not
covered under definition will be excluded from IBC?
Intent of excluding financial service providers from IBC ?

20. Role of RBI in functioning of NBFCs
Regulatory
• Ensure that NBFCs serve the financial system efficiently.
• Protect the interest of depositors.
• Entry norms for NBFCs and prohibition of deposit acceptance by unincorporated bodies engaged in financial
business.
• Compulsory registration, maintenance of liquid assets and creation of reserve fund.
• Power to issue directions for NBFCs.
Supervisory
• On-site Inspection
• Off-site Surveillance System
• Market intelligence
• Exception reports of statutory auditors of NBFCs

21. Role of RBI in the functioning of NBFCs
Yearly inspection by RBI
• RBI does yearly inspection of large size NBFCs
• Occasional inspection of small NBFCs
• As part of inspection RBI carries out thorough check on compliance by NBFCs.
• Issues letter of supervisory concerns noticed during inspection asking for
clarifications/ giving warnings
• NBFCs need to place the supervisory concerns raised by RBI before the Board
of Directors and reply to the concerns raised by RBI also needs to be approved
by Board.

22. Minimum reserve and capital
requirements
Creation of Statutory Reserve Fund as per Section 45IC of RBI Act
• Every NBFC shall create a reserve fund and the transfer therein a sum not less than
20% of its net profit every year as disclosed in the profit and loss account and before
any dividend is declared.
• No appropriation of any sum from the reserve fund shall be made by the NBFCs
except for the purpose as may be specified by the RBI from time to time and every
such appropriation shall be reported to the RBI within twenty-one days from the date
of such withdrawal.
Minimum capital requirement
• NBFCs are required to maintain Minimum Net owned fund (NOF) of Rs 2 crore

23. NOF Calculation
NET OWNED FUNDS
Paid-up equity capital
(+) i. Preference shares compulsorily convertible into equity
ii. free reserves (i.e General Reserve + Statutory Reserve etc)
iii. Share premium account
iv. capital reserves representing surplus arising out of sale proceeds of asset
(-) i. accumulated balance of loss
ii. deferred revenue expenditure; and
iii. other intangible assets;
= OWNED FUNDS (A)
(-) 1. investments of such company in shares of–
i. its subsidiaries;
ii. companies in the same group; and
iii. all other non-banking financial companies;
2. the book value of debentures, bonds, outstanding loans and advances (including hire-purchase and lease finance)
made to, and deposits with–
i. subsidiaries of such company; and
ii. companies in the same group;
to the extent such amount exceeds ten per cent of (A) above
= NET OWNED FUNDS

24. Applicability of prudential regulations
NBFC
Not Accepting
Deposits
Non-Systemic
Significance i.e
Asset < 500 crore
NBFC-ND
If accessing public
funds
Prudential
Regulations apply
Systemic
Significance i.e
Assets>= 500 crore
NBFC-ND-SI
Prudential
Regulations apply
Accepting Public
Deposits
NBFC-D
Prudential
Regulations apply

25. Key prudential regulations
Prudential
Regulations
Minimum Capital
Adequacy Ratio
Asset Classification
Provisioning
requirements
Income
Recognition
Concentration of
Credit /investment
norms
Disclosure in
Balance sheet

26. Key prudential regulations- Capital adequacy
Capital adequacy ratio (CAR) is a specialized ratio used to determine the adequacy of
capital in view of risk exposures.
RBI has prescribed a minimum capital adequacy ratio so as to provide the NBFCs with a
cushion to absorb losses before they become insolvent. This improves stability in
financial markets and protects deposit-holders.
NBFCs have to maintain a minimum capital ratio consisting of Tier I and Tier II capital of
not less than 15% of its aggregate risk weighted assets on balance sheet and of risk
adjusted value of off-balance sheet items out of which total of Tier I capital should not
be less than 10%. (CAR= (Tier1 capital+ Tier 2 capital)/Risk Weighted Assets)

27. Key prudential regulations
Asset
Classification
Standard Asset
Non performing
Asset
Sub-Standard
Asset
Doubtful Asset Loss Asset

28. Key prudential regulations
Asset Classification Norms: All forms of credit (including receivables) are to be classified into
five categories as follows:
 Standard Asset:
An asset in respect of which, no default in repayment of principal or payment of interest is perceived and
which does not disclose any problem or carry more than normal risk attached to the business.
 Non-Performing Asset (NPA):
An asset is classified as NPA when it has remained overdue for a period of three months or more.

29. Key prudential regulations
 Sub-Standard Asset:
 An asset which has been classified as non-performing asset for a period not exceeding 12 months; or
 an asset where the terms of the agreement regarding interest and / or principal have been renegotiated/
rescheduled/restructured after commencement of operations, until the expiry of one year of
satisfactory performance under the renegotiated or rescheduled or restructured terms.
 Doubtful Asset:
 A term loan or lease asset or a hire purchase asset or any other asset which remains a sub-standard asset
for a period exceeding 12 months.
 Loss Asset:
An asset which has been identified as loss asset by a NBFC or its internal or external auditor or by the RBI during the
inspection, to the extent it is not written off; and
An asset which is adversely affected by a potential threat of non-recoverability due to either erosion in the value of security or
non-availability of security or due to any fraudulent act or omission on the part of the borrower

30. Evergreening of loans- supervisory action
Evergreening is a practice of providing a fresh loan to repay an old loan.
For example, an NBFC lending money to a company to repay its old loan or to pay another bank’s or NBFCs loan.
Any restructuring done without looking into cash flows of the borrower and assessing the viability of the
projects / activity financed by NBFCs is treated as an attempt at ever greening a weak credit facility and invites
supervisory concerns / action.
The problem with such practice is that it may keep a loan from going in default in short run, but in long term, it
increases bank’s/ NBFCs exposure to a troubled credit. Also using the practice of evergreen loans NBFCs tend to
show less stressed assets in the balance sheet, therefore a clear picture of economic scenario is not reflected.

31. Key prudential regulations
NBFC’S – PROVISIONING REQUIREMENTS
Assets % of provision required
• Standard Assets 0.40%
• Sub-standard Assets 10%
• Doubtful debts (Secured
Portion)
o upto 1 year 20%
o 1 year to 3 years 30%
o More than 3 years 50%
• Doubtful debts
(Unsecured Portion)
100%
• Loss assets 100%

32. Key prudential regulations
Income Recognition
•Income including interest / discount / hire charges
/ lease rental or any other charges on NPA shall be
recognised only when it is actually realised.
•Any income recognised before the asset became
NPA and remaining unrealised shall be reversed.

33. Concentration of credit/investment
Single borrower /entity Group of borrower
/entity
Remarks
Lend to 15% of its owned fund 25% of its owned fund • NBFCs need to
formulate a policy in
this regard.
• Investment in
debentures are
treated as credit and
not investment
• Includes off balance
sheet items
Invest in share 15% of its owned fund 25% of its owned fund
Lending and investment
(taken together)
25% of its owned fund 40% of its owned fund
Exemptions:
• Investment in shares and lending to its subsidiaries or companies in same group to the extent they
have been reduced from owned funds for calculation of NOF.
• If NBFC has not accessed public funds in India directly or indirectly and has not issued guarantee

34. Disclosure in Balance sheet
Provisions to be showed separately in the balance sheet
• Capital to Risk Assets Ratio (CRAR)
• Exposure to real estate sector
• Exposure to capital market
• Gross value of investments in India and outside India
• Details on Non –performing financial assets purchased / sold
including sector-wise NPA and movement of NPAs

35. Disclosure in Balance sheet
Provisions to be showed separately in the balance sheet
• Maturity pattern of assets and liabilities
• Details of single borrower limit and group borrower limit exceeded
by the NBFC
• Registrations obtained from other financial sector regulators
• Disclosure of Penalties imposed by RBI and other regulators
• Credit ratings assigned and changes thereto
• Customer complaints

36. Key prudential regulations
Loan against NBFCs own shares is prohibited:
• No NBFC shall lend against its own shares or debentures.
Loan against security of shares:
• Maintain Loan to Value (LTV) ratio of 50 percent for loans
granted against the collateral of shares.
• In case of shortfall in maintenance of 50 % LTV due to
movement in share prices, same to be made good within 7
working days.

37. Key prudential regulations
Finalization of Balance sheet:
NBFCs need to finalise their balance sheet within a period of 3 months from the date to which it pertains.
Changes to be intimated:
Change of address of NBFC, principal officers, directors, auditors and officers authorised to sign on behalf
of NBFC to be intimated to RBI within 30 days of change
Board resolution:
Non Deposit Taking NBFCs to pass Board resolution within 30 days of commencement of each financial
year, to the effect that the company has neither accepted public deposit nor would accept public deposit

38. Applicability of Corporate Governance (CG)
NBFC
Not Accepting
Deposits
Non-Systemic
Significance i.e
Asset < 500 crore
NBFC-ND
Corporate
Governance does
not apply
Systemic
Significance i.e
Assets>= 500 crore
NBFC-ND-SI
Corporate
Governance apply
Accepting Public
Deposits
NBFC-D
Corporate
Governance apply

39. Corporate Governance (CG)
Committees to
be formed
Audit
Committee
Nomination
Committee
Risk
Management
Committee
Asset Liability
Management
Committee

40. Corporate Governance (CG)
Fit and Proper
Criteria
Put in place a Policy
at the time of
appointment for
directors
Declaration and
Undertaking from
Directors
Deed of Covenant
Change of Directors-
furnish quarterly
statement to RBI

41. Corporate Governance (CG)
Disclosure and
Transparency
Risk Management
System
Frame internal
guidelines on CG
with approval of BOD
Disclosures in Annual
Financial Statements

42. Corporate Governance (CG)
Rotation of Partners
in Statutory Auditors
Firm
Rotate the partner/s
of the CA firm
conducting the audit,
every 3 years.
Partner so rotated
shall be eligible to
conduct audit after 3
years.

43. Fair Practice code to be followed
Formulation of fair practice code while doing lending business
NBFCs having customer interface need to follow the Know Your Customer (KYC) Direction,
2016, issued by the Department of Banking Regulation.
NBFCs having customer interface to develop Grievance Redressal Mechanism
• Disputes of its customer arising out of decisions of its functionaries are heard and disposed of at least at next
higher level
• Senior Official of NBFC to be appointed as Grievance Redressal Officer and name and contact details to be
displayed at its branches and places where business is carried on
• If complaint/ dispute is not redressed within a period of 1 month, the customer can appeal to Officer-in-charge of
RBI.

44. Asset Liability Management System
NBFCs to keep altering the Asset liability portfolio in a dynamic way to manage the risk
NBFCs should develop information system and make use of specialised software for managing assets
and liabilities maturity mismatches
Frame Risk Management Policy setting the limits for liquidity, interest rate and equity price risk etc
Integration of Operations and Strategic decision making for risk management
Formation of Asset Liability Management Committee(ALCO)- which should
◦ ensure that NBFC operates within the limits set by Board;
◦ interest to be charged on loans and advances;
◦ management of interest rate and liquidity risk.
NBFCS are required to file various returns i.e ALM-1, ALM-2,ALM-3 and ALM-yearly as prescribed by
RBI to address its concerns regarding Asset-Liability Mismatch and Interest Rate risk

45. Fraud Reporting by NBFCs
NBFCs shall put in place a reporting system for recording frauds and should fix staff
accountability in respect of delays in reporting of fraud cases to the RBI.
NBFCs shall disclose the amount related to fraud, reported in the company for the year in their
balance sheets and
NBFCs should submit a copy of the Quarterly Report on Frauds in the prescribed format to the
Regional Office of the RBI.

46. NBFC Auditor’s report- RBI Directions
2016
In addition to the report to be submitted under Section 143 of the Companies Act, 2013, the Auditors of an NBFC are
required to report to the BOD on following:
Registration (for all NBFCs):
•Company meeting Principle Business Criteria – Whether NBFC registration is obtained
•Company holding CoR – Whether its entitled to hold CoR
•Whether the Company meets with Net Owned Fund requirements
For NBFC’s not accepting public deposits:
•Board Resolution for non – acceptance of public deposits
•Whether it has accepted any deposits during the year
•Whether it has followed prudential norms w.r.t. income recognition, accounting standards, asset classification, provisioning of bad and doubtful debts
•Capital adequacy ratio disclosed in NBS 7 is correct and whether it meets the minimum ratio prescribed by the RBI
•Whether NBS 7 has been filed in stipulated time

47. NBFC Auditor’s report- RBI Directions
2016
Reasons for any unfavourable / qualified statement made w.r.t. above points or where
the auditor is unable to express any opinion on any of the items referred to above, his
report shall indicate such fact together with reasons therefor.
Exception Report to the RBI - It shall be the obligation of the auditor to make a report
(exception report) containing the details of such unfavourable / qualified statements /
non-compliance to the concerned Regional Office.
NBFCs have to submit the auditors report as above to RBI within one month from the
date of finalization of the balance sheet and in any case not later than December 30th
of that year.

48. Key Regulatory IT Framework
Information Technology Framework (Applicable to Systemically Important NBFCs)
IT Strategy Committee is to be formed:
• To approve IT strategy and policy documents
• To ensure IT investments represent a balance of risks and benefits and that budgets are acceptable;
• To monitor the method that management uses to determine the IT resources needed to achieve strategic goals;
• To institute effective governance mechanism and risk management process for all IT outsourced operations
Various Policies to be adopted:
• Information Security (IS) Policy
• Cyber Security Policy
• Cyber Crisis Management Plan (CCMP)
• IT Policy

49. Key Regulatory Framework
Business Continuity Plan:
• BCP shall be designed to minimise the operational, financial, legal, reputational and other material consequences arising from any
disaster
• BCP may have features like Business Impact Analysis and Recovery strategy/Contingency Plan
• The test should be based on ‘worst case scenarios’
• The results along with the gap analysis should be placed before the Chief Information Officer and the Board
IT Enabled Management Information System (MIS):
• NBFCs should have an effective system generated MIS :
• Dashboard for the Top Management summarising financial position vis-à-vis targets
• System enabled identification and classification of SMA and NPA as well as generation of MIS reports
• MIS should facilitate pricing of products, especially large ticket loans
• MIS should capture regulatory requirements and their compliance
• Financial Reports including operating and non-operating revenues and expenses, cost benefit analysis of segments/verticals, cost of
funds, etc
• Fraud analysis, Incident reporting their impact and steps taken for non-recurrence of such events in the future

50. Key Regulatory Framework
Outsourcing Policy:
• NBFC intending to outsource any of its financial activities are required to put in place
a comprehensive outsourcing policy, approved by its Board, inter alia, containing
criteria for selection of such activities as well as service providers
• The terms and conditions governing the contract between the NBFC and the service
provider shall be carefully defined in written agreements and vetted by NBFC's legal
counsel
• NBFCs need to ensure that the service provider periodically tests the Business
Continuity and Recovery Plan and may also consider occasional joint testing and
recovery exercises with its service provider.
• In a group structure, NBFCs may have back-office and service arrangements/
agreements with group entities.

51. Key Regulatory Framework
Outsourcing Policy:
• Outsourcing of any activity by NBFC does not diminish its obligations and those of its Board and
Senior Management who are ultimately responsible for the outsourced activity.
• NBFC therefore need to ensure that the Service provider employs the same high standard of care in
performing the services as is expected to be employed by the NBFCs.
• NBFCs cannot outsource following activities
• Internal Audit
• Strategic and Compliance Functions
• Decision making Functions such as determining compliance with KYC norms for opening deposit
accounts
• According sanction for loans
• Management of investment portfolio

52. Key Regulatory Framework
NBFCs are allowed to issue Perpetual Debt Instruments (PDI)
Guidelines on private placement of NCDs -the provisions of companies Act for issue of debentures
shall be applicable to the extent they are not inconsistent with the RBI guidelines in this regard.
All NBFCs with an asset size of Rs 100 crore and above shall inform the Credit rating and changes
thereto to RBI within 15 days
NBFCs cannot be partners in partnership firms/ LLP/ AOPs
NBFCs (other than those which are purely into investment activities without any customer interface)
have to become member of Credit Information Companies (CIC) and submit data of their clients to
them. NBFCs are considered as Credit Institutions.
NBFC cannot undertake credit card business without prior approval of RBI but can issue co-branded
credit cards with scheduled commercial banks without risk sharing
NBFCs can engage into the distribution of mutual fund products

53. Key Regulatory Framework
Powers under Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI Act):
• Systemically important NBFCs have been categorized as ‘secured lenders’ under the
SARFAESI Act. As such, these NBFCs may now enforce security interests on assets charged to
them, without having to resort to either judicial or arbitral authorities.
Prior approval of RBI required for opening of
braches/subsidiary/JV/representative office or undertaking investment
abroad

54. Policies to be adopted by NBFC
Policies
Know Your Customer/AML policy Policy for making provision on Standard Assets
Fair practice code Resource planning policy
(On issue of NCDs by the Company)
Loan policy Risk Management System
Investment policy Policy on Related party transactions
Concentration of Credit /investment policy Fit and proper criteria
Interest rate policy
Information Technology polices
Derivate Policy Internal guidelines on Corporate Governance
Asset Liability Management policy
Outsourcing policy

55. Appointment of designated officials
Sr. No. Position Responsibilities
1 Principal Officer Compliance of KYC and PMLA Directions
2 Compliance Officer Compliance of RBI Directions and other authorities
3 Information Officer Ensure dissemination of information to RBI on a timely basis
4 Chief Information Officer Ensure implementation of IT Policy to the operational leveL
5 Nominated Officer for Fraud
reporting
Responsible for submitting returns and reports under
Monitoring of Fraud Directions of RBI
6 Grievance Redressal Officer Resolution of grievances of Customers of NBFC

56. Acquisition / Transfer of control of NBFCs:
Prior approval of RBI required for
• Any takeover or acquisition of control of NBFC, which may or may
not result in change of management
• Any change in shareholding which would result in acquisition /
transfer of shareholding of 26 percent or more of paid up equity
capital.
• Any change in the management of NBFC which results in change of
more than 30% of the Directors excluding independent directors

57. Framework for Revitalising Distressed
Assets in the economy
•For early recognition of financial distress and Prompt steps for resolution, RBI has made
following framework to arrest increasing NPA
• Before a loan account turns into an NPA, NBFCs are required to identify incipient stress in the account by
creating a sub-asset category viz” Special Mention Accounts” (SMA) with the three sub-categories:
NBFCs have to closely monitor the accounts reported as SMA 1 or SMA-0 as these are the early
warning signs of weakness in the account

58. Framework for Revitalising Distressed
Assets in the economy
•NBFCs are required to report the relevant credit information on all the borrowers having aggregate
fund based and non-fund based exposure of Rs 5 crore and above and the SMA status of borrower on
a quarterly basis to Central Repository of Information on Large Credits (CRILC).
•NBFCs must put in place a proper Management Information and Reporting System so that any
account having principal or interest overdue for more than 60 days gets reported as SMA-2 on the
61st day itself.
•As soon as the account is reported as SMA-2, by one or more Banks/NBFCs, a joint lender forum (JLF)
is formed and formulation of corrective action plan (CAP) get triggered.
Repercussions of not reporting SMA status by NBFCs
If NBFCs fail to report SMA status of the accounts to CRILC or resort to methods with the intent to
conceal the actual status of the accounts or evergreen the account, NBFCs are subjected to
accelerated provisioning requirements for these accounts and/or other supervisory actions as
deemed appropriate by RBI.

59. Ombudsman Scheme for NBFCs- 2018
Circular dated Feb 23, 2018
•Scheme currently operationalized for All Deposit Taking NBFCS
To provide system for redressal of complaints against deficiency in services concerning deposits, loans
and advances
To promote conducive credit culture among NBFCs and to regulate credit system
To resolve complaints free of cost
•In case customer is not satisfied with solution provided by NBFC or has not received reply from
NBFC within a month, can complaint to the Ombudsman for NBFCs
•NBFCs to appoint Nodal Officer (NO) and Principal Nodal Officer (PNO)
•Nodal Officer shall be for representing the NBFC and furnishing information to Ombudsman in
respect of complaints filed against the NBFCs

60. Ombudsman Scheme for NBFCs- 2018
Circular dated Feb 23, 2018
•Name and details of Nodal Officer and Principal Nodal Officer to be reported to Chief General
Manager RBI
•Display of Scheme and name of NO/PNO at branches & website
•Currently there are Four Ombudsman Centres (Chennai, Kolkata, Mumbai and New Delhi)

61. Prevention of Money Laundering Act,
2002- Obligations of NBFCs
NBFCs need to appoint a senior management officer to be designated as Principal
Officer
NBFCs should ensure that the Principal Officer is able to act independently and report
directly to the senior management or to the Board of Directors. The role and
responsibilities of the Principal Officer should include overseeing and ensuring overall
compliance with regulatory guidelines on KYC/AML issued under the Prevention of
Money Laundering Act, 2002, rules and regulations made thereunder.

62. Returns to be submitted by NBFC-ND-SI
Sr.
No
Name of the Return Periodicity Reporting Time
1 NBS7 (To capture compliance with prudential norms ) Quarterly 15 days
2 NBFCs-ND-SI 500cr (To capture financial details) Quarterly 15 days
3 ALM-1 (Asset Liability mismatches and interest rate risk) (6
months projections)
Quarterly 15 days
4 ALM-2 & 3 (to show asset liability maturity position) Half yearly 30 days
5 ALM-(NBFC-ND-SI) Annual 15 days
6 Branch Info return (To capture the reach and geographical
spread of NBFCs)
Quarterly 15 days
7 Reporting to Central Repository of Information on Large
Credits (CRILC)- early Recognition of Financial Distress
Monthly 21 days
8 Reporting of Special Mention Account status (SMA-2 return) Weekly On Every Friday
9 Statutory Auditor Certificate Annual One month
from the date of
finalisation of

63. Core Investment Company
Core Investment Company (CIC), that is to say, a non-banking financial company carrying on the
business of acquisition of shares and securities and which satisfies the following four conditions
as on the date of the last audited balance sheet:-
i. it holds not less than 90% of its net assets in the form of investment in equity shares,
preference shares, bonds, debentures, debt or loans in group companies;
ii. its 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
and units of Infrastructure Investment Trust only as sponsor constitute not less than 60% of its
net assets;
iii. it does not trade in its investments in shares, bonds, debentures, debt or loans in group
companies except through block sale for the purpose of dilution or disinvestment

64. Core Investment Company
(iv) it does not carry on any other financial activity referred to in Section 45I(c) and 45I (f) of the
Reserve Bank of India Act, 1934 except
(a) investment in
(i) bank deposits,
(ii) money market instruments, including money market mutual funds and liquid mutual funds
(iii) government securities, and
(iv) bonds or debentures issued by group companies,
(b) granting of loans to group companies and
(c) issuing guarantees on behalf of group companies.

65. Core Investment Company
"net assets" means total assets excluding -
(i) cash and bank balances;
(ii) investment in money market instruments and money market mutual funds;
(iii) advance payments of taxes; and
(iv) deferred tax payment.
“Public funds" includes funds raised either directly or indirectly through public deposits, inter-
corporate deposits, bank finance and all funds received from outside sources such as funds raised by
issue of Commercial Papers, debentures etc. but excludes funds raised by issue of instruments
compulsorily convertible into equity shares within a period not exceeding 10 years from the date of
issue.
Indirect receipt of public funds means funds received not directly but through associates or group
entities which have accessed public funds.

66. Core Investment Company
“systemically important Core Investment Company (CIC-ND-SI)” means a core investment
company having total assets of not less than ₹100 crore either individually or in aggregate along
with other CICs in the Group and which raises or holds public funds.
“Companies in the Group” means an arrangement involving two or more entities related to
each other through any of the following relationships, viz. Subsidiary – parent (defined in terms
of AS 21), Joint venture (defined in terms of AS 27), Associate (defined in terms of AS 23),
Promoter-promotee [as provided in the SEBI (Acquisition of Shares and Takeover) Regulations,
1997] for listed companies, a related party (defined in terms of AS 18) Common brand name,
and investment in equity shares of 20% and above).
Every CIC shall apply to the RBI for grant of Certificate of Registration within a period of three
months from the date of becoming a CIC-ND-SI.

67. Core Investment Company
If a Company is a CIC but it does not access public funds in any form then irrespective of asset
size it will not be required to register itself as CIC.
If in a group there are 4-5 CIC with an asset size of more than Rs 100 crore, but only one CIC has
accessed public funds then only the CIC which has accessed public funds need to apply for
registration as CIC to RBI.

69. Reservation for QIBs of a maximum of 50% of the offer in IPOs
coming under Regulation 26(1) of the ICDR Regulations and a
minimum of 75% of the offer in IPOs coming under Regulation
26(2) of ICDR Regulations; b. Eligibility to take part in Qualified
Institutional Placements (QIPs) made under Chapter VIII of
ICDR Regulations, which, inter-alia, allows allotment at 5%
discount to the prevailing market price; c. Eligibility to obtain
firm allotment under Anchor investor portion in the IPO.

70. For NBFCs registered with the RBI under Section 45-IA of the RBI
(Amendment) Act, 1997, 2[and for housing finanace companies registered
with the national housing bank] ‘the adequacy’ of DRR will be 25% 10[of the
value of outstanding debentures] issued through public issue as per present
SEBI (Issue and Listing of Debt Securities) Regulations, 2008, and no DRR
is required in the case of privately placed debentures.