The Reserve Bank of India (RBI) regulates the workings and activities of NBFCs in India under the Reserve Bank of India Act, 1934. Because banks are unable to meet all of India’s financial business demands, non-banking financial companies (NBFCs) play a critical role in the country’s financial industry.
Without a question, NBFCs have altered the landscape of India’s financial services sector. For the 2018-19 financial year, NBFCs are expected to rise by a whopping 19-21 percent. The RBI has implemented tougher restrictions for NBFCs following the notorious episode with Sahara India Financial Corporation in 2015. These institutions must now comply with NBFC compliance and return requirements. For the operation of NBFCs, the RBI has issued numerous notifications and amendments. Obligations under PML regulations and the withdrawal of exemptions from government-owned NBFCs are two of the most recent examples. The RBI has also required that NBFCs be subject to Sections 269SS and 269T.
The Reserve Bank of India (RBI) drafted and implemented the Master Direction – Non-Banking Financial Company – Non-Systemically Important Non-Deposit Taking Company (Reserve Bank) Directions, 2016 on September 1, 2016. These master instructions set the groundwork for RBI-compliant and secure NBFC operations. The NBFC Compliances and Returns are extensive, and they must be studied attentively to prevent RBI closure.
Features of Prudential Regulations for NBFC Compliance and Returns
- For relevant NBFCs, the leverage ratio cannot exceed 7 at any moment (Except NBFC-MFI and NBFC-IFCs)
- Accounting Standards– NBFCs shall follow ICAI-issued accounting standards and guidance notes as long as they are not in breach of the Master Guidelines.
- Investment Accounting– All relevant NBFCs’ Boards of Directors must develop and implement an investment policy.
- Policy on Demand/Call Loans– The Board of Directors must draught and execute a policy for awarding/intentionally issuing demand/call loans.
- Standard assets should be 0.25 percent of outstanding debt, and eligible NBFCs must make arrangements to ensure this.
- The assets of NBFCs in a group will be combined to see if they fall below the Rs. 500 crore limits.
- All eligible NBFCs must report provisions for bad and doubtful loans, as well as reserves for investment depreciation.
- The details in the schedule set out in the Master Directions must be appended to the balance statement of all eligible NBFCs.
- Loans against NBFCs’ own shares are forbidden- It is unlawful for all eligible NBFCs to lend against their own shares.
- A Loan to Value (LTV) ratio of 50% is required for applicable NBFCs with assets equal to or more than Rs 100 crores lending against the collateral of listed shares.
- A credit/investment concentration for applicable NBFCs – This clause applies to NBFCs held by NOFHC (Non-Operative Financial Holding Company)
- A change in location, auditors, or directors shall be communicated to all eligible NBFCs within one month of its occurrence.
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