1. The document discusses the regulatory framework for non-banking financial companies (NBFCs) in India including definitions, registration requirements, prudential norms, and recommendations of the Usha Thorat Committee. 2. It provides details on the classification of NBFCs based on their business and public deposit acceptance, capital adequacy requirements, prudential norms on income recognition and provisioning. 3. The USHA THORAT Committee recommended increasing the minimum asset size for registering new NBFCs and subjecting large NBFCs to corporate governance norms similar to listed companies.

1. Presentation
By
CS NEERAJ VERMA

2. -Legal framework for NBFCs
-Regulatory framework for NBFCs
-USHA THORAT Committee
1. Recommendations

4. A company which carried on as its business or part of its business the following
activities:
- financing
- acquisition of securities
- hire purchase
- insurance
- chit fund
- mutual benefit company
But does not include a company which carries on as its principal business:
- agricultural operations,
- industrial activities
- Sale and purchase of goods
- providing of services
- purchase, sale and construction of immovable property

5. Definition of Principal Business
RBI Press Release Dt. April 8, 1999
- If 50% or more of a company’s total assets (netted
off by intangible assets) are financial assets
and
- If 50% or more of a company’s gross income is
from financial assets
then the Principal Business of the company is of a NBFC

6. Always Remember
 NBFC per se is a licensed activity like
Banking, Stock Broking, Money
Changing.
 Acceptance of Public Deposits is
irrelevant for NBFC test.
 Income earned & Deployment of Funds
are determining factors
RBI Press Release No.
1999-2000/1042 dated 8.2.2000

7. Registration and Net Owned Fund (Sec 45- IA)
No NBFC shall commence or carry on
business of NBFI without obtaining a Certificate
of Registration & having minimum Net owned
funds
•Registration with RBI is mandatory for all companies
interested in carrying on non- banking finance activities.
• Minimum Net Owned funds of Rs.2 Crores.

8. Computation of Net Owned Fund
Paid up share capital
Add : free reserves (created through an allocation of profits)
Deduct : accumulated balance of losses
: deferred revenue expenditure
: other intangible assets
Deduct : if the following are in excess of 10% 0f the above
-Investment in shares in shares of
subsidiaries, cos., in the same group and other NBFCs
-Book value of debentures, bonds, loans & advances to
subsidiaries and cos. in the same group
-Deposits with subsidiaries and cos. in the same group

9. - 1. Housing finance company
- 2. Insurance company
- 3. Chit Fund company
- 4. Stock exchange
- 5. Securitisation and Reconstruction company
6. Mortgage Guarantee Company
- 7. Nidhi company
- 8. Mutual Benefit Company
- 9. Venture capital fund company
- 10. Micro Finance company
- 11. Merchant banking company
- 12.Stock brokers and sub-brokers

10.  Provided they comply with the following
conditions:
 Hold registration with SEBI under related
regulations,
 Do not accept or hold public deposits.

11. Exemption to NBFCs engaged in Micro Financing
Provided the following conditions are met:
- providing credit not exceeding Rs.50,000 for a
business enterprise and Rs.1,25,000 for meeting
the cost of a dwelling unit to any poor person,
- licensed U/S. 25 of the Companies Act, 1956 and
- not accepting public deposits.

12.  Provided they comply with the following
conditions:
 Registered with SEBI under related regulations,
 Acquires securities only as a part of its
merchant banking business,
 Does not carry on any other financial activities
and
 Does not accept or hold public deposits

13.  -Doing the business of stock broker or sub-
broker and
 - holding a valid certificate of registration from
SEBI.

14.  Definition:
 -If 90% or more assets are invested in Group
Companies (subsidiaries,Associates and JVs) ( as
per last audited accounts)
 - it is not trading in those shares( except for block
sale)
 - does not carry any other NBFI activities and
 - it is not accepting or holding any public
deposits.

15.  -CICs having asset size of Rs. 100 Crores and more:
 -to be considered as systemically important CICs. (CICs-ND-SI)
 - all group CICs to be clubbed for calculating the asset size.
 - would require registration u/s 45-IA of the RBI Act.
 - 90% criteria to be seen as investment in equity, preference
shares as well as loans to group companies (with only minimum
60% in shares).
 - can make bank deposits and investment in money market
securities and Govt. Securities
 -Transitory provision: can apply within six months and can
continue to carry on business till decision of RBI regarding
registration.

16.  A large number of NBFCs are working
without registration:
 Companies working without registration and
 Companies rejected by RBI still operating.
 Penalties:
 Imprisonment 1 to 5 years and
 Fine of Rs. 1 lakh to 5 lakhs.

17. 1. 1.Application for Registration in the
prescribed Form containing:
 - Identification Particulars,
 - Capital Funds & Risk Assets,
 - Information on Management.
Ann-III
 2.MOA, AOA, Board Resolution,
Accounts and Business Plan.
 3. Application to be filed on line.

18.  - Management Background
 BOD
Executive
Funding
 - Track record of other NBFCs in the
group
 - CR from Bankers
 - Interview of promoters/directors
 - Definitive business plan
 - Auditor’s certificate

19. -Appeal against the RBI Order rejecting the
Application to the Central Government, Ministry of
Finance
- To 1. to dispose of financial assets within 3 years from date
of rejection/cancellation.
2. If deposit taking –
i) repay deposits and
ii) report outstanding position on monthly basis (NBS-4)
3. Take up Other objects & change the name
4. Voluntary winding up

20. - -Certificate from statutory auditors to be
submitted to RBI every year.
- - Confirming that it continue to undertake business
of NBFI and therefore requires to hold CoR granted
by RBI.

21. For all NBFCs:
 - public notice 30 days before effecting the
sale or transfer,
 - in two newspapers one English and local
vernacular language,
 - jointly by NBFC, transferor and transferee,
 - within seven days of publication, intimation
to RBI
For Deposit Accepting NBFCs
- Prior approval of RBI
- Obligation towards deposit holders

23. Classification of NBFCs
• Based on nature of business:
•Asset finance companies
•Investment companies
•Loan companies
•Infrastructure finance companies

24. AFC: Financing of physical assets supporting productive economic
activities such as automobiles, tractors, earth moving
machinery,lathe machines, generator sets, material handling
equipments and general purpose industrial machinery.
IFC: long term funding for developing or operating and maintaining
or developing, operating and maintaining any infrastructure
project in road, highway, port, airport inland port, waterways,
water supply, irrigation project, water treatment, sanitation
and sewage system or solid waste management, telecom
services (basic or cellular), network and internet service,
transmission or distribution of power, laying down and
maintenance of gas, crude oil and petroleum pipelines

25. Classification of NBFCs
Based on acceptance of Public Deposits
- Deposit holding/accepting Company - Category ‘A’
- Non-Deposit holding/accepting Company - Category ‘B’
Based on investment pattern
- Investment company (Cat ‘A’ or Cat ‘B’)
- Core Investment company - Category ‘C’

26.  -NBFC Acceptance Of Public Deposit (RB)
Directions, 1998
 -NBF (Deposit Accepting or Holding)
companies Prudential Norms (RB)
Directions,2007

 - NBFC Advertisement Rules,1977.

27.  Regulated deposits and exempt deposits
 Quantum of deposit
 Credit rating
 Advertisement/ Statement in lieu of
Advertisement
 Period of deposit
 Rate of interest
 Rate of brokerage

28.  Repayment of deposit
 Regularisation of excess deposit
 Premature payment of deposits
 Loan against deposit
 Default in payment of deposit or interest
thereon
 Interest on overdue deposits
 Deposit Register
 Deposit Receipts

29.  Percentage of Liquid assets
 Nature of liquid assets
 Mode of liquid assets
 Safe custody of approved securities
 Floating charge on liquid assets in favour of
depositors

30.  KYC norms
 Due diligence of deposit accepting
agents/brokers

31.  -Qtly returns (NBS 3)
 -Annual Return (NBS 1)
 -Audited financial statements with directors
report

32.  -NBF (Non-Deposit Accepting or Holding )
Companies Prudential Norms (RB)
Directions, 2007
 -Additional rules for NBFCs-ND-SI (having
total assets of Rs.100 Crores and above as
shown in the last audited Balance Sheet).

33.  -To maintain prescribed minimum capital
ratio and leverage ratio.
 -Adjusted net worth should not be less than
30% of aggregated risk weighted assets on
balance sheet and risk adjusted off balance
sheet items.
 -outside liability should not exceed 2.5
times of its adjusted net worth based on
the last audited accounts.
 Would be entitled to exemptions:
 - of maintaining minimum NOF
 - of prudential norms relating to capital adequacy
and exposure norms.

34.  1. Separately for Category ‘A’ and Category
‘B’ companies.

 2. Additional requirements for Category ‘A’
companies.
 3. Exemptions.

35.  Accounting policies
 Accounting standards
 Revenue recognition

36.  Investment in land & building
 Investment in shares
 Policy on investment and disclosure
 Income from investment
 Exposure to capital market

37.  Classification of debtors
 Provisioning norms
 Disclosure
 Accounting for Repossessed assets

38.  Policy for call/demand loans
- - Period
- - Interest
- - Renewal
- - Reporting and approval

39.  Concentration of loans/investment
 - single borrower
 - more than one borrowers in one group
 - investment in one company
 - investment in more than one companies in a
group

40.  Schedule to the Balance Sheet
 - to be appended to the Balance sheet prescribed
under the Companies Act, 1956
 - showing loans and advances and deposits
outstanding and overdue
 - borrower groupwise classification of all assets, lease,
HP and Loans and advances
 - Investor groupwise classification of all investment
in shares and securities
 - information on NPAs.

41.  Communications to RBI (DNBS)
 Change in director ship
 Change in ownership
 Change in address of registered office
 Change in statutory auditors
 Deposit accepting branch- opening & closure

42.  - Code for Fair Practices
 - To be framed and adopted by BOD
 - To be filed with RBI
 - To be publicised

43.  Half yearly returns (NBS-2)

44.  Returns to Fraud Monitoring Cell.
 Information regarding prevention of money
laundering under PMLA.
 AIR information under Income Tax Act.

45.  Off-site surveillance
 Returns
 Auditors’ Reports
 Market intelligence
 On-site surveillance
 Inspections
 Special audits

47.  A minimum asset size of more than Rs 50 crores
for registering any new NBFC.
 Transfer of shareholdings , direct or indirect of
25% and above ,change in control, merger or
acquisition of any registered NBFC will require
prior approval of RBI.

48.  Twin criteria of assets and income for determining
the principal business of an NBFC increased to 75% of
the total assets and 75%of the total income.
 Tier –I capital for capital to risk weighted assets
ratio(CRAR) purposes would be specified at12%to be
achieved in three years.
 NBFC’s would be subject to regulations similar to
Banks while lending to stock brokers and merchant
banks and similar to stock brokers , as specified by
SEBI.

49.  -Risk weights for NBFC’s that are not sponsored by
banks or that do not have any bank as part of the
group would be raised to 150 % for capital
markets exposures and 125% for CRE exposures.
 NBFC’s would be given the benefit under
Securitization and Reconstruction of Financial
Assets and Enforcement of securities
interest(SARFAESI) Act , 2002.
 All registered NBFC’s with assets of Rs 1000 crores
and above whether listed or not should comply
with Clause 49 of listing agreement including
induction of independent Directors.