Reserve Bank of India on 10 November 2014 tightened its norms for Non-Banking Financial Companies (NBFCs) by requiring them to have a much stronger capital base. Failing to which, the NBFCs would lose their CoR (Certificate of Registration). NBFCs have been given time till March 2017 to comply with the norms.
The step was taken in the wake of public investors increasingly being defrauded in the name of non-banking financial services. Its objective is to mitigate risks in the sector.
Revised norms for NBFCs
- The NBFCs in operation before April 1999 have been mandated to increase their minimum Net Owned Fund (NOF) requirement from 25 lakh rupees to 2 crore rupees by 2017 in a phased manner. By March 2016, the NBFCs will have to raise the NOF to 1 crore rupees.
- The core capital adequacy ratio for all non-deposit taking NBFCs with an asset size of 500 crore rupees has been streamlined. Such NBFCs will now have to maintain a core capital ratio of 10 percent, compared with a range of 7.5 percent to 12 percent currently.
- The criteria for directors of NBFCs have also been brought on par with banks.
- Classification of loan NPAs for NBFCs has also been brought in line with banks. All NBFCs have to classify loans overdue for 90 days as NPAs. However, this new rule will be applied in a phased manner starting in March 2016 till March 2018.
- Provisions for standard assets have also been increased from 0.25 percent of the loans outstanding to 0.40 percent of loans in a phased manner starting from March 2016 and to be complied by March 2018.
- For deposit-taking NBFCs, it has been mandated that unrated asset-financing NBFCs that accept deposits must get an investment grade rating by March 2016 or stop accepting deposits.
- Also between now and March 2016, 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 will now be allowed to accept deposits up to 1.5 times of their net owned funds, down from four times their net owned funds earlier. NBFCs above this threshold have been asked not to renew deposits.
The norms were tightened taking into account important recommendations made by the Working Group on Issues and Concerns in the NBFC Sector chaired by Usha Thorat and the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households chaired by Dr. Nachiket Mor.