RBI Panel headed by Usha Thorat presented Guidelines on non-banking finance company (NBFC)

Reserve Bank of India (RBI) panel headed by headed by Usha Thorat, Director, Centre for Advanced Financial Research and Learning (CAFRAL) on 29 August 2011 presented its suggestion on non-banking finance company (NBFC). The panel suggested the central bank to insist on a minimum asset size of more than Rs.50 crore for registering any new non-banking finance company (NBFC). The panel reccomended deregistration of the existing NBFCs that fell below the limit prescribed.

However  the panel mentioned that the minimum net owned fund (NOF) requirement for all new NBFCs that wish to register with the Reserve Bank could be retained at the present Rs.2 crore till the Reserve Bank of India Act is amended. NBFCs not accessing public funds could be exempted from registration provided their assets are below Rs.1000 crore.

Transfer of shareholding, direct or indirect, of 25 per cent and above, change in control, merger or acquisition of any registered NBFC will require prior approval of the Reserve Bank. The panel sugested the twin-criterion of assets and income for determining the principal business of an NBFC to be increased to 75 per cent of the total asset and 75 per cent of the total income, respectively. A time period of three years could be given to fulfil revised principal business criteria.

Tier-I capital for capital to risk weighted assets ratio (CRAR) purposes would be specified at 12 per cent to be achieved in three years for all registered deposit-taking and non-deposit-taking NBFCs. Liquidity ratio is to be introduced for all registered NBFCs. Suitable income tax deduction akin to banks could be allowed for provisions made under the regulations. Accounting norms applicable to banks would be applied to NBFCs.

The panel mentioned that NBFCs would be subject to regulations similar to banks while lending to stock brokers and merchant banks and similar to stock brokers, as specified by the Securities and Exchange Board of India (SEBI), while undertaking margin financing. Board approved limits for bank's exposure to real estate would be made applicable for the bank group as a whole, where there is an NBFC in the group.

 The risk weights for NBFCs that are not sponsored by banks or that do not have any bank as part of the group would be raised to 150 per cent for capital market exposures and 125 per cent for commercial real estate (CRE) exposures. In case  of bank-sponsored NBFCs, the risk weights for capital market exposures (CME) and CRE would be the same as specified for banks.

NBFCs would be given the benefit under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. Captive NBFCs, would maintain Tier-I capital at 12 per cent from the time of registration.

For the purpose of applicability of registration and supervision, total assets of all NBFCs in a group ought to be taken together to determine the cut off limit of Rs.100 crore and all NBFCs with assets of Rs.1,000 crore and above, whether listed or not, should be required to comply with Clause 49 of SEBI Listing Agreements.
The panel talked about the inclusion of coverage ratio, liquidity ratio, asset liability profile, extent of financing of parent company products, movement of NPAs, off-balance sheet exposures, structured products and securitisations/assignments in the disclosure for NBFCs with assets over Rs.100 crore should include provision.

Highlights of RBI panel’s guidelines on NBFCs

•    A minimum asset size of more than Rs.50 crore for registering any new non-banking finance company (NBFC).
•    Transfer of shareholding, direct or indirect, of 25 per cent and above, change in control, merger or acquisition of any registered NBFC will require prior approval of the Reserve Bank.
•    Twin-criterion of assets and income for determining the principal business of an NBFC to be increased to 75 per cent of the total asset and 75 per cent of the total income,
•    Tier-I capital for capital to risk weighted assets ratio (CRAR) purposes would be specified at 12 per cent to be achieved in three years
•    NBFCs would be subject to regulations similar to banks while lending to stock brokers and merchant banks and similar to stock brokers, as specified by.
•    Risk weights for NBFCs that are not sponsored by banks or that do not have any bank as part of the group would be raised to 150 per cent for capital market exposures & 125 per cent for CRE exposures.
•    NBFCs would be given the benefit under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002