RBI Guidelines For NBFCs

Introduction:

The contribution of NBFCs towards supporting real economic activity and their role as a supplemental channel of credit intermediation alongside banks is well recognized.

Over the years, the sector has undergone considerable evolution in terms of size, complexity, and interconnectedness within the financial sector. Many entities have grown and become systemically significant and hence there is a need to align the regulatory framework for NBFCs keeping in view their changing risk profile.

In January 2021, the RBI had deliberated a new regulatory approach for NBFCs through its discussion paper titled ‘Revised Regulatory Framework for NBFCs Scale-based Approach'. On 22 October 2021, the RBI issued a Notification on ‘Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs' (SBR Framework), which categorized into four layer that is Base Layer (NBFC BL), Middle Layer (NBFC-ML) , Upper Layer (NBFC-UL), and Top Layer (NBFC-TL).

The objectives to restructure the regulatory set for Non-Banking Financial Companies by keeping certain provisions static, revising specific requirements, protecting financial stability and introducing new mandates.

We have summarized the key regulatory changes effected with respect to the above in our report.

Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs

The Bill seeks to amend the Competition Act, 2002, which gives the Competition Commission of India (CCI) its powers to prevent practices that harm competition and the interests of consumers.

Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs

As the SBR framework encompasses different facets of regulation of NBFCs covering capital requirements, governance standards, prudential regulation, etc., it has been decided to first issue an integrated regulatory framework for NBFCs under SBR providing a holistic view of the SBR structure, set of fresh regulations being introduced and respective timelines. These guidelines shall be effective from October 01, 2022, except the Ceiling on IPO Funding.

NBFCs shall comprise of four layers based on their size

(A) Base Layer (NBFC-BL): The Base Layer shall comprise of :

• Non-deposit taking NBFCs below the asset size of ₹1000 crore,
• NBFCs undertaking the following activities-
  1. NBFC-Peer to Peer Lending Platform (NBFC-P2P)
  2. NBFC-Account Aggregator (NBFC-AA)
  3. Non-Operative Financial Holding Company (NOFHC)
  4. NBFCs not availing public funds and not having any customer interface.
• NBFC-P2P -NBFC Peer to Peer Lending platform is a type of Non-Banking Financial Company which carries on the business of providing services of Loan facilitation to willing lenders and borrowers through online platform. This type of Non-Banking Financial Company is not allowed to accept deposits or lend on its own.
• NBFC-AA -The Account Aggregator framework, introduced by the RBI, aims to make financial data more accessible by creating data intermediaries called Account Aggregators (AA) which will collect and share the user’s financial information from a range of entities that hold consumer data called Financial Information Providers (FIPs) to a range of entities that are requesting consumer data called Financial Information Users (FIUs) after obtaining the consent of the consumer.
• NOFHC -Non-Operative Financial Holding Company (NOFHC) means a non-deposit taking NBFC which holds the shares of a banking company and the shares of all other financial services companies in its group, whether regulated by Reserve Bank

(B) Middle Layer (NBFC-ML)

The Middle Layer shall consist of:

• All Deposit Taking NBFCs (NBFC-DS), Irrespective Of Asset Size
• Non-deposit Taking NBFCs With Asset Size Of ₹1000 Crore And Above 
• NBFCs Undertaking The Following Activities-
  1. Standalone Primary Dealers (SPDs)
  2. Infrastructure Debt Fund - Non-banking Financial Companies (IDF-NBFCs)
  3. Core Investment Companies (CICs)
  4. Housing Finance Companies (HFCs)
  5. Infrastructure Finance Companies (NBFC-IFCs).

(C) Upper Layer (NBFC-UL)

The Upper Layer shall comprise of those NBFCs which are specifically identified by the Reserve Bank as warranting enhanced regulatory requirement based on a set of parameters and scoring methodology as provided in the Appendix to this circular.

(D) Top Layer (NBFC-TL)

The Top Layer will ideally remain empty. This layer can get populated if the Reserve Bank is of the opinion that there is a substantial increase in the potential systemic risk from specific NBFCs in the Upper Layer.

Minimum Capital Requirements -

 No company can carry out NBFC business without obtaining Certificate of Registration from RBI. Minimum Capital requirements for each type of NBFC are as under:

However, for NBFC-P2P, NBFC-AA, and NBFCs with no public funds and no customer interface, the NOF shall continue to be ₹2 crore. It is clarified that there is no change in the existing regulatory minimum NOF for NBFCs - IDF, IFC, MGCs, HFC, and SPD.

NPA Classification - The extant NPA classification norm stands changed to the overdue period of more than 90 days for all categories of NBFCs. A glide path is provided to NBFCs in Base Layer to adhere to the 90 days NPA norm as under

List Of Returns Submitted By All NBFCs

Compliance Function and Role of Chief Compliance Officer (CCO) – NBFCs

This Circular shall be applicable to all NBFC-UL and NBFC-ML. NBFCs in the Base Layer (NBFC-BL) shall continue to be governed under the existing guidelines.

NBFC-UL and NBFC-ML shall put in place a Board approved policy and a Compliance Function, including the appointment of a Chief Compliance Officer (CCO)

Framework for Compliance Function and Role of Chief Compliance Officer in Non-Banking Financial Companies in Upper Layer and Middle Layer (NBFC-UL & NBFC-ML)

1. Compliance Risk

This is the risk of material financial loss of NBFC may suffer, as a result of its failure to comply with laws And regulations.

2. Scope and Coverage of Compliance Function

Compliance Function shall ensure strict observance of all statutory and regulatory requirements for the NBFC.

3. Responsibility of the Board and Senior Management

• The Board / Board Committee3 shall ensure that an appropriate Compliance Policy is put in place and implemented.
• The Senior Management shall carry out an exercise, at least once a year, to identify and assess the major Compliance risk.

4. Responsibilities of Compliance Function

Compliance Function shall be responsible for undertaking the following activities :

• Assist the Board and the Senior Management in overseeing the implementation of Compliance Policy.
• The Chief Compliance Officer (CCO) shall be a member of the 'new product' committee/s.
• Compliance Function shall monitor and test Compliance by performing sufficient and representative Compliance testing.

5. Broad Contours of Compliance Framework in NBFCs

• Compliance Policy
• Compliance Structure
• Compliance Programme
• Authority
• Dual Hatting
• Qualifications and Staffing of Compliance Function
• Internal Audit & Independent Review of Compliance Function
• Supervisory Focus

6. Appointment and Tenure of CCO

• Tenure: The CCO shall be appointed for a minimum fixed tenure of not less than 3 years.
• Removal: The CCO shall be transferred / removed before completion of the tenure.
• Rank: The CCO shall be a senior executive of the NBFC.
• Skills: The CCO shall have a good understanding of the industry and risk management practices.
• Stature: The CCO shall have the ability to exercise judgment independently.
• Conduct: CCO shall have a clean track record and unquestionable integrity;
• Reporting Line: The CCO shall have direct reporting lines to the MD & CEO and / or Board / Board Committee.

Disclosures in Financial Statements- Notes to Accounts of NBFCs

Non-Banking Finance Companies (NBFCs) are required to make disclosures in their financial statements in accordance with existing prudential guidelines, applicable accounting standards, laws, and regulations. 

Loans and Advances – Regulatory Restrictions – NBFCs

A) Guidelines applicable to NBFC - Middle Layer (ML) and NBFC - Upper Layer (UL) - Regulatory Restrictions on Loans and Advances

1. Loans and Advances to Directors -

Unless sanctioned by the Board of Directors/ Committee of Directors, NBFCs shall not grant loans and advances aggregating Rupees five crores and above to :-

• their directors (including the Chairman/ Managing Director) or relatives of directors.
• any firm in which any of their directors or their relatives is interested as a partner or manager.
• any company in which any of their directors, or their relatives is interested as a major shareholder, director.

2. Loans and advances to Senior Officers of the NBFC -

The Loans and advances sanctioned to senior officers of the NBFC shall be reported to the Board.

Explanation:

The term ‘loans and advances’ will not include loans or advances against -

• Government securities
• Life insurance policies
• Fixed deposits
• Stocks and shares
• Housing loans, car advances, etc.
• Granted to an employee of the NBFC under any scheme applicable generally to employees.

Scale Based Regulation (SBR) for NBFCs: Capital requirements for NBFC-UL

NBFC-UL shall maintain Common Equity Tier 1 capital of at least 9 per cent of Risk Weighted Assets. The detailed guidelines in this regard are provided below:

NBFC-UL shall maintain, on an on-going basis, Common Equity Tier 1 (CET1) ratio of at least 9 per cent.

Applicability

This circular is applicable to all NBFCs identified as NBFC-UL, except Core Investment Companies (CICs).

 Elements of Common Equity Tier 1 capital will comprise the following:

1. Paid-up equity share capital issued by the NBFC
2. Share premium resulting from the issue of equity shares
3. Capital reserves
4. Statutory reserves 
5. Revaluation reserves
6. Other free reserves. 
7. The following regulatory adjustments / deductions shall be applied in the calculation of CET1:
   • Goodwill and all other intangible assets should be deducted from Common Equity Tier 1 capital. 
   • Deferred Tax Assets (DTAs)
   • Impairment Reserve4 shall be not be recognised in CET1 capital.

Large Exposures Framework for Non-Banking Financial Company - Upper Layer

“Large Exposure” (“LE”) means the sum of all exposure values of a NBFC-UL measured in terms of paragraph 6 of these instructions, to a counterparty and/or a group of connected counterparties, if it is equal to or above 10 percent of the NBFC-UL’s eligible capital base.

1) Scope of application

• The guidelines shall be applicable to NBFC-UL,
• Exposure shall comprise both on and off-balance sheet exposures by the NBFC-UL. 

2) Scope of counterparties and exemptions

• NBFC-UL’s exposure to all its counterparties and groups of connected counterparties. The exposures that are exempted from the LEF are listed below:
• Exposure to the Government of India and State Governments which are eligible for zero percent risk weight under capital regulations applicable to NBFC-UL;
• Exposure where the principal and interest are fully guaranteed by the Government of India.

3 ) The Large Exposure limits of Single Counterparty:

• The sum of all the exposure values of an NBFC-UL to a single counterparty must not be higher than 20 percent of the NBFC-UL’s available eligible capital base at all times.
• Board of the NBFC-UL may allow additional 5 percent exposure beyond 20 percent but at no time higher than 25% of the NBFC-UL’s eligible capital base. 

Legal Entity Identifier (LEI) for Borrowers

On a review, it has been decided that the guidelines on LEI stand extended to Primary (Urban) Co-operative Banks (UCBs) and Non-Banking Financial Companies (NBFCs).

It is further advised that non-individual borrowers enjoying aggregate exposure of ₹5 crore and above from banks1 and financial institutions (FIs)2 shall be required to obtain LEI codes as per the timeline given as Following:-

Timeline for obtaining LEI by borrowers

Guidelines on Compensation of Key Managerial Personnel (KMP) and Senior Management in NBFCs

The guidelines are intended only for providing broad guidance to NBFCs and their NRCs in formulating their compensation policy. 

These guidelines will be applicable for fixing the compensation policy of Key Managerial Personnel1 and members of senior management2 of all Non-Banking Financial Companies under SBR framework, except those categorised under ‘Base Layer’3 and Government owned NBFCs.

These guidelines shall come into effect from April 01, 2023.

Review of Minimum Investment Grade Credit Ratings for Deposits of NBFCs

It has been decided that the minimum investment grade credit rating for deposits of NBFCs shall be ‘BBB–’ from any of the SEBI-registered Credit Rating Agencies.

New Definition of Micro, Small and Medium Enterprises – Clarification

In the said Notification, in paragraph 7, in sub-paragraph (3), for the figures and the words, “31st day of March, 2022” the figures and words “ 30th day of June, 2022” shall be substituted. 

In view of the above amendment, it is clarified that the existing Entrepreneurs Memorandum (EM) Part II and Udyog Aadhaar Memorandum (UAM) of the MSMEs obtained till June 30, 2020 shall remain valid till June 30, 2022 for classification as MSMEs.

Extension Of Timeline For Implementation Of Certain Provisions

Reserve Bank had prescribed a timeline of July 01, 2022, for implementation of the provisions of the paragraph 1 (b) of the Master Direction – Credit Card and Debit Card Issuance and Conduct Directions,2022.

it has been decided to extend the timeline for implementation of the Paragraph 6(a)(vi) , Paragraph 6(b)(v) & Paragraph 9(b)(ii) provisions of the Master Direction, to October 01, 2022.

Provisioning Requirement For Investment In Security Receipts (SRs)

The difference between the carrying value of such SRs and the valuation arrived at as on the next financial reporting date after the date of issuance of MD-TLE, in terms of clause 77 of the MD-TLE, may be provided over a five-year period starting with the financial year ending March 31, 2022 - i.e. from FY2021-22 till FY2025-26.

Bilateral Netting of Qualified Financial Contracts - Amendments to Prudential Guidelines

While computing capital requirements for counterparty credit risk, the following exposures, wherever allowed to be undertaken, are exempted.

• Foreign exchange (except gold) contracts which have an original maturity of 14 calendar days or less.
• ‘sold options’, provided the entire premium / fee or any other form of income is received.
• For Credit Default Swap transaction where bank is protection seller.

Responsibilities Of Regulated Entities Employing Recovery Agents

It has been observed that the agents employed by regulated entities (REs) have been deviating from the extant instructions governing the outsourcing of financial services. In view of concerns arising from the activities of these agents, it is advised that the REs shall strictly ensure that they or their agents do not resort to intimidation or harassment of any kind, either verbal or physical, against any person in their debt collection efforts, sending inappropriate messages either on mobile or through social media, making threatening and/ or anonymous calls, persistently1 calling the borrower and/ or calling the borrower before 8:00 a.m. and after 7:00 p.m. for recovery of overdue loans, making false and misleading representations, etc.

Risk Weights For Exposures Guaranteed By Credit Guarantee Schemes (CGS)

The risk weight of zero percent shall be applicable in respect of exposures guaranteed under any existing or future schemes launched by CGTMSE, CRGFTLIH and NCGTC satisfying the following conditions: 

• The guarantees provided under the respective schemes should comply with the requirements for credit risk mitigation, which inter alia requires such guarantees to be direct, explicit, irrevocable and unconditional;
• Restrictions on permissible claims: Where the terms of the guarantee schemes restrict the maximum permissible claims through features like specified extent of guarantee coverage, clause on first loss absorption by member lending institutions (MLI), payout cap, etc.
• In case of a portfolio-level guarantee, effective from April 1, 2023, the extent of exposure subjected to first loss absorption by the MLI, if any, shall be subjected to full capital deduction and the residual exposure shall be subjected to risk weight as applicable to the counterparty in terms of extant regulations, on a pro rata basis.

Multiple NBFCs in a Group: Classification in Middle Layer

In line with the existing policy on consolidation of assets of the NBFCs in a Group, the total assets of all the NBFCs1 in a Group2 shall be consolidated to determine the threshold for their classification in the Middle Layer.

If the consolidated asset size of the Group is ₹1000 crore and above, then each Investment and Credit Company (NBFC-ICC), Micro Finance Institution (NBFC-MFI), NBFC-Factor and Mortgage Guarantee Company (NBFC-MGC) lying in the Group shall be classified as an NBFC in the Middle Layer and consequently, regulations as applicable to the Middle Layer shall be applicable to them.

Statutory Auditors are required to certify the asset size (as on March 31) of all the NBFCs in the Group every year.

Voluntary Surrender Of Cor By NBFCs (Including HFCs) For Cancellation

The Reserve Bank receives requests from NBFCs (including HFCs) seeking to surrender the Certificate of Registration (CoR) voluntarily on account of ceasing to carry out the business of Non-Banking Financial Institution or Housing Finance Institution / conversion to unregistered Core Investment Company / amalgamation or merger with other entity etc. In order to streamline the process of voluntary cancellation of CoR, the Reserve Bank today has uploaded the application form and checklist of documents to be submitted by the NBFCs/HFCs.

It may be noted that, mere submission of application with documents by a company cannot be treated as cancellation of CoR. The NBFC/HFC needs to continue adhering to the guidelines/instructions issued by the RBI/NHB/other competent authority etc., and also continue submitting requisite regulatory/supervisory returns etc., as applicable, until the CoR is cancelled and the decision is communicated by the Reserve Bank to the entity concerned.

Unique Document Requirement for CoR Cancellation

• Write-up in brief on the details of the company that it proposes to undertake post cancellation of CoR,
• No-Objection Certificate (NOC)/Prior permission from the Reserve Bank before approaching the competent authority (viz. NCLT, Court, RoC etc. as applicable),
• Copy of scheme of amalgamation (as applicable),
• Certified copy of order from the competent authority approving the merger/amalgamation/dissolution/voluntary strike-off. (as applicable)

Data Format for Furnishing of Credit Information to Credit Information Companies

It is clarified that cases admitted with National Company Law Tribunal (NCLT)/National Company Law Appellate Tribunal (NCLAT) under the Insolvency and Bankruptcy Code, 2016 are also required to be reported under the suit-filed cases in reporting to the CICs

Central Payments Fraud Information Registry – Migration of Reporting to DAKSH

The Reserve Bank of India (RBI) had operationalised the Central Payments Fraud Information Registry (CPFIR) in March 2020 with reporting of payment frauds by scheduled commercial banks and non-bank Prepaid Payment Instrument (PPI) issuers.

The fraud reporting module is being migrated to DAKSH – Reserve Bank’s Advanced Supervisory Monitoring System. The migration will be effective from January 01, 2023.

Issuance Of PPIs To Foreign Nationals / Non-resident Indians (NRIs) Visiting India

• It has been decided to allow access to Unified Payments Interface (UPI) to foreign nationals and NRIs visiting India. 
• Such PPIs can also be issued in co-branding arrangement with entities authorised to deal in Foreign Exchange under FEMA
• The amount outstanding at any point of time in such PPIs shall not exceed the limit applicable on full-KYC PPIs;