Non Banking

Finance
Company
ICAI-DELHI

04-05-2013

Bhavesh Vora

CA

Topics Covered

Meaning of NBFC
Classification of NBFCs
Types of NBFCs
Net Owned Funds requirement
Capital Adequacy Requirement
Concentration of Credits/Investments
Prudential Norms NPA Provisioning
Requirements

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

Topics Covered

Other Important Norms

Auditors Report Directions, 2008
Returns Requirements
Core Investment Companies (CICs)
Formation Procedure
Recent Amendments

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

Banks Vs. Non-Banks

Both are Financial Intermediaries

Banks Can:

Maintain Demand Deposits (savings/current

Accounts)
Form a Part of Payment and Settlement
Mechanism

Non-banks Can

Accept only term Deposits

Does not form Part of
Settlement Mechanism

04-05-2013

ICAI-Delhi
Bhavesh Vora

Payment
CA

and

Meaning of NBFC
Section 45I (f) of RBI act, 1934
Non-banking financial company means

a Financial Institution which is a company;

a Non-Banking Institution which is a

company and which has as its Principal
Business the receiving of deposits, under any
scheme or arrangement or in any other
manner, or lending in any manner;

such other Non-Banking Institution or class

of such institutions, as RBI specifies
Non-Banking Institution - means a
company , corporation or co-operative society
04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

Classification of NBFCs
Mainly there are following types of NBFCs
Asset

Finance Company

Equipment Leasing
Hire Purchase Finance

Investment

Company
Loan Company
Core

Investment Companies

Infrastructure

Finance Companies

Factor
Micro

Finance Institutions
Infrastructure Debt Funds

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

Classification of NBFCs

Asset Finance Company (AFC) would be

defined as any company which is a financial
institution carrying on as its principal
business the financing of physical assets
supporting productive / economic activity.

rincipal business - aggregate of financing real/physical assets supportin

Principal
economic activity and income arising therefrom is not less than 60% of
o
its total assets and total income respectively

The onus of including only eligible assets

for the purpose of classification as AFC
shall be that of the company concerned.

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

Classification of
NBFCs

Investment Companies (IC) means any company which

a financial institution carrying on as its principal busine
of acquisition of securities

Loan Companies (LC) means any company which is a

nancial institution carrying on as its principal business
roviding of finance whether by making loans or advanc
or otherwise for any activity other than its own but doe
not include an Asset Finance Company
04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

Types of NBFCs

Deposit accepting NBFCs.

Non deposit Accepting NBFCs

Systemically important (SI)

Not systemically important NBFCs

NBFC-ND-SI', means an NBFC not accepting / not holding

Public Deposits and having total assets of Rs 100 crore
and above as shown in the last audited balance sheet.
NOF to be maintained at Rs. 200 lacs at all the time
04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

Capital Adequacy

Capital to risk assets ratio (CRAR) in case of

NBFC-ND-SI shall not be less than 15%

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

10

Steps for calculation of

CRAR

Step I Find out owned funds

Step II From Owned fund, derive Net
owned fund (Tier I Capital)
Step III Find Tier II capital
Step IV Derive Total Risk Weighted
Assets (TRWA)

CRAR = (Tier I+Tier II)/TRWA

TRWA = Total Risk weighted assets of B/S and

Off balance sheet items

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

11

Maintenance of CRAR

CRAR (Capital to Risk Asset Ratio)

Capital in the form of Tier I and Tier II capital to be
maintained against total risk weighted assets.
Calculation of Tier I Capital (i.e. Net owned funds)
Sum of
Share Capital (Paid up capital + Preference shares
which are compulsorily convertible into equity)
Free Reserves (Including General Reserves, Debenture
redemption reserves, Capital Redemption Reserves,
Credit balance in P&L Account, Other Free reserves (to
be specified))
Capital reserves representing surplus arising out of sale
proceeds of asset + Balance in share premium account
04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

12

Calculation of CRAR

Deduct from above

Deferred Revenue Expenditure

Reserves created by revaluation of assets
Accumulated loss balance
Losses in the current period and those
brought forward from previous periods
Book value of Intangible assets
Deferred Tax Asset

The Resultant Figure will be Owned Funds

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

13

Calculation of CRAR
Further deduct from the Owned Funds

Investments in shares of other NBFCs, Investments in

shares, debentures, bonds, outstanding loans and
advances including hire purchase and lease finance
made to and deposits with subsidiaries and companies
from the same group exceeding, in aggregate, 10% of
the owned fund

Perpetual debt instruments issued by a NBFC-ND-SI to

the extent not exceeding 15% of the aggregate Tier I
capital - as on 31st March of Previous Accounting Year

The result is Tier I capital (Net Owned Fund)

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

14

Calculation of CRAR
Calculation of Tier II capital (Aggregate of Below
items)
Preference shares other than those which are
compulsorily convertible into equity
Revaluation Reserves (RR) - 45% is only taken
in calculation of tier II capital
General Provisions and Loss Reserves to the
extent these are not attributable to actual
diminution in value or identifiable potential
loss in any specific asset and are available to
meet unexpected losses, to the extent of one
and one fourth (1.25) percent of risk weighted
assets. (Include provisions on standard assets)
04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

15

Calculation of CRAR
Cont
Hybrid Debt Capital Instruments
Perpetual debt instruments issued by a
SI-ND NBFC which is in excess of what
qualifies for Tier I Capital
Subordinated Debts
Result is Tier II capital
Tier II cannot be greater than
Tier I capital for calculation of capital adequacy
04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

16

Calculation of Risk
Assets
Weights assigned
as below
Asset
Fixed Assets
Bonds of Public
Sector Banks
Investment in
PDI of NBFCs
Shares/Debentur
e/CPs/Bonds

Cash and Bank

04-05-2013

Weight Amount Weighte

d Amt
100
500
500
20
500
100
100/0

500

500

100

500

500

20

ICAI-Delhi
Bhavesh Vora

CA

17

Calculation of Risk
Assets
Asset
Weight Amount Weighte
Stock on
Hire
Inter
Corporate
Loans/Depos
its
Loans to
staff
Other
04-05-2013
Secured

100

500

d Amt
500

100

500

500

50

100

200

200

ICAI-Delhi
Bhavesh Vora

CA

18

Risk Weights for Off

Balance sheet items
Conversion Factor (Weights) are assigned for off
balance sheet items as follows
Financial and other guarantees, partly paid
shares /debentures, bills discounted
/rediscounted /Lease contracts entered into but
yet to be executed

100
%

Shares/Debentures underwriting obligations &

Other Contingent Liabilities (To be specified in
the calculation)

50%

Cash margins/deposits shall be

deducted before applying the conversion factor.

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

19

Important Notes for CRAR

Calculation
(1) Netting may be done only in respect of assets
where provisions for depreciation or for bad and
doubtful debts have been made.
(2) Can net off the amount of cash margin/caution
money/security deposits (against which right to
set-off is available) held as collateral against the
advances out of the total outstanding exposure of
the borrower.
Assets
which have been deducted from owned
fund to arrive at net owned fund shall have
a weightage of zero
04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

20

Important Notes for

CRAR Calculation..

Revised Capital Adequacy Framework for

Off-Balance Sheet Items for NBFCs has been
announced by RBI which needs to be
adhered to while calculating off balance
sheet exposure
NBFCs primarily engaged in lending against
gold jewellery (such loans comprising 50
percent or more of their financial assets)
shall maintain a minimum Tier l capital of 12
percent by April 01, 2014

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

21

Concentration of
Credit/Investment

(NBFC-D and NBFC-ND-SI)

To formulate a policy in respect of exposure to

a single party/a single group of parties

Not to lend
(a) to any single borrower exceeding 15% of
its owned funds and (b) to any single group
of borrowers exceeding 25% of its owned
funds
Not to Invest in (a) the shares of another company
exceeding 15% of its owned funds (b) the
shares of single group of companies
exceeding 25% of its owned fund

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

22

Concentration of
Credit/Investment

(NBFC-D and NBFC-ND-SI)

Not to lend and Invest (loans and
investments taken together) exceeding
(a) 25% of its owned fund to a single party and
(b) 40% of its owned fund to a single group of
parties
Note: Any systemically important non-deposit taking nonbanking financial company not accessing public funds,
either directly or indirectly, or not issuing guarantees
may make an application to the Bank for an
appropriate dispensation consistent with the spirit of
the exposure limits.

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

23

Provisioning Norms
Classification of Assets
Standard Assets
t
s
s
h
e
t
r
Interest and Principal Repayment te
n
o
In x m

i
)
s
are regular
A an
P
(N th
Sub-standard assets
s
e
t
r
e
o
ss
m
a
r
Doubtful Assets
ng g fo
i
m in
r
Loss Assets
o
d
f
n
r
a
e
e st
p
n out
o
N al
ip
c
ip
r
/P

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

24

Provisioning Norms

Standard Assets

Sub standard assets

0.25% of standard assets (Notification dated 17 th January,

2011)
Non performing assets for a period of 18 months.
Renegotiated loans upto one year of satisfactory performance
of new terms.
Provide 10% on the outstanding amount
No specific provisions regarding Security

Doubtful Assets

Remains sub standard asset for period of 18 months and above

Provide 100% of uncovered outstanding amount
To the extent of unsecured loan which is covered by value of
realizable securities, the provisioning required based on the
period the asset has remained doubtful
i. upto one year - 20%, ii. one to three year - 30%, iii. more
than three years - 50%
04-05-2013
ICAI-Delhi
CA
25
Bhavesh Vora

Provisioning Norms

Loss Assets

Identified by the Company, its Auditors or

RBI (Period is not specified) or
Potential threat of Non Recoverability due
to erosion in the value of securities or non
availability of security or any fraudulent
act or omission on the part of the
borrower
100% Write off in the books
(Same treatment for the Interest)

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

26

Other Important Norms..

(All NBFCs)

Certain disclosures should be made in the Balance

sheet as per format prescribed

Disclosure in balance sheet only for NBFC-ND-SI

Provisions for bad and doubtful debts

Provisions for depreciation in investments
Capital to Risk asset ratio (CRAR)
Exposure to real estate sector, both direct and indirect
and
Maturity pattern of assets and liabilities

For all NBFCs - Transfer of 20% profit to Special

Reserves (RBI Act)
Schedule to be appended to the balance sheet in
notes to accounts (Format is prescribed)

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

27

Other Important Norms..

(All NBFCs)
Submission of certificate from statutory
auditors
Certificate at the end of FY certifying the
eligibility of the company to hold
Certificate of Registration as NBFC
Certificate to indicate asset and income
pattern
To be given within one month from the
"Every non-banking financial company
finalisation
balance
not
later
shall finaliseof
itsthe
balance
sheet sheet
within a
period
of
th Dec. in any case
than
30
3 months from the date to which it pertains"
04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

28

Asset Income Pattern

In order to identify a particular company as an

NBFC,
consider both, the assets and the
income pattern - from the last audited balance
sheet to decide principal business.

Financial Assets are more than 50 per cent

of its Total Assets (netted off by Intangible Assets)
AND

Income from financial assets should be

50 per
the
gross
income
more
Fixed than
Deposits
with cent
Banksofare
not
considered
as
Financial Assets (RBI Notification no. 259)

29

For Attention of
Auditors:

Auditors Report :
Auditors to submit additional
Report to the Board of Directors
The auditor shall also make a
separate report to the Board of
Directors of the Company

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

30

Auditors Report
Matters to be included in the auditors
report
The auditors report (Issued to Directors) on the
accounts of a NBFC shall include a statement on
the following matters, namely:
In the case of all non-banking financial
companies
I. Whether the company is engaged in the
business of NBFI and whether it has obtained a
Certificate of Registration (CoR) from the Bank
04-05-2013

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Bhavesh Vora

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31

Auditors Report
II. In the case of a company holding CoR issued
by the Bank, whether that company is entitled
to continue to hold such CoRin terms of its
asset/income pattern as on March 31st of the
applicable year.
III. If the company is classified as AFC,
Whether the NBFC has been correctly
classified as AFC as defined in RBI Directions
with reference to the business carried on by it
during the applicable financial year.
04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

32

Auditors Report
In the case of an NBFC-ND
The auditor shall include a statement on:
i.

ii.

iii.

Whether the Board of Directors has passed

a resolution for non- acceptance of any
public deposits.
Whether the company has accepted any
public
deposits
during
the
relevant
period/year;
Compliance with the prudential norms

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

33

Auditors Report
Additional Reporting
NBFC-ND-SI

in

respect

of

(a) Calculation and compliance with

Capital adequacy requirements
(b) Whether annual statement of
capital funds, risk assets/exposures and
risk asset ratio (NBS-7) was furnished
to the bank within the stipulated period
04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

34

Auditors Report
Other Requirements:
1.

Reasons
to
unfavourable
statements

2.

Obligation of auditor to submit

exception report to the Bank (RBI)

be
or

stated
for
qualified
an

Auditor to make a report to the regional

office containing the details of unfavorable
or qualified statements and about the noncompliance, as the case may be, in respect of
the company

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

35

Returns Requirements

For NBFC-ND-SI (Apart from returns applicable

to all NBFCs of any asset size)
Monthly Return on Financial Parameters
Monthly NBS-ALM-1 for Short Term Dynamic
Liquidity
Half Yearly NBS-ALM-2 for Structural Liquidity,
NBS-ALM-3 for Interest Rate Sensitivity
NBS 7 Quarterly return on Capital Funds,
Risk Assets
Monthly Reporting if Raised short term foreign
currency borrowings
Fraud Reporting as and when detected FMR I
and Quarterly in FMR II, III for Fraud
outstanding, Progress report respectively

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

36

Returns
Requirements.cont
Quarterly
return
on
important
financial parameters for NBFC
having asset size between 50-100
crores
Note: Above is indicative list of
important returns and the same is
not exhaustive, one has to see the
detailed list based on the asset size
and type of the NBFC.

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

37

Core Investment Companies

(CICs)
What is CICs?:

(i) Holds not less than 90% of Net Assets in group

companies;
(ii) Investments in equity shares in group companies
constitutes not less than 60% of its Net Assets; (Net
asset defined in Directions)
(iii) It does not trade in its investments except through
block sale for the purpose of dilution or
disinvestment;
(iv) It does not carry on any other financial activity
except some
acts
C is considered
SIspecified
only if raising/holding
public funds

AND Total Assets of Rs. 100 crore or above

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

38

Core Investment Companies

(CICs)
For CIC-ND-SI
Capital Requirements: minimum capital ratio.
i.e. Adjusted net worth at all time shall not be
less than 30% of its aggregate Risk Weighted
Assets and Risk adjusted value of off balance
sheet as at the last balance sheet date
Leverage Ratio: Outside liabilities at all times
shall not exceed 2.5 times its Adjusted Networth
as on the date if the last audited balance sheet
Exemptions Given: (i) CIC-ND-SI are exempted
from para 15, 16 and 18 of the NBFC Norms,
2007 and ii) Norms 2007 not apply for CIC-NDs
(Other than systemically
important)
04-05-2013
ICAI-Delhi
CA

Bhavesh Vora

39

Core Investment
Companies (CICs)

RBI has Announced Core Investment

Companies
Overseas
Investment
(Reserve Bank) Directions, 2012 for CICs
making investments abroad, opening
branches,
representative
offices,
undertaking joint ventures, etc. abroad.
The same needs to be followed.
RBI has also separately issued guidelines
for entry of Core Investment Companies
in insurance sector

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

40

Formation Procedure

A company with main object clause/ancillary clause

for carrying out NBFI activities (check object
clause)
Obtain checklist of requirements from RBI website
Fill up prescribed form, available on RBI website,
according to instructions with the requirements
Fill up the e-form provided in excel format
Get the required certifications of the statutory
auditors/chartered accountants (as the case may
be)
Submit softcopy on RBI website before submission
of the hard copy.

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

41

Formation Procedure
Cont

Obtain the printout of successful submission of

the softcopy. Mention the date of submission on
the print if date is not appearing on print.
Submit the hardcopy application in duplicate to
regional office of RBI
Each page in the application file should be
numbered
Prepare the application in triplicate so that a
replica is with the applicant for future
reference.

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

42

Recent Amendments

NBFCs need to display grievance redressal

mechanism
and
contact
details
of
grievance redressal officer at prominent
place in offices/branches/places of business
Fair
Practices
Code
(which
should
preferably in the vernacular language as
understood by the borrower) based on the
guidelines announced should be put in
place by all NBFCs with the approval of
their Boards

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

43

Recent Amendments
cont

Revision in format for submission of

returns for PMLA compliances and
Uploading of Reports in 'Test Mode' on
FINnet Gateway for PMLA Reporting
Facility to NBFC-ND-SI - Direct Access to
Negotiated
Dealing
System-Order
Matching
Change in Loan to Value ratio for
companies predominantly in loan against
gold products

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

44

Recent Amendments
cont

Amendments to definition of infrastructure loan

NBFCs cannot become partners in partnership
firms
Review of Guidelines on entry of NBFCs into
Insurance Business
RBI
issued
NBFC
(Opening
of
Branch/Subsidiary/Joint Venture/Representative
Office or Undertaking Investment Abroad by
NBFCs) Directions, 2011

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

45

Recent Amendments
cont

Guidelines for Credit Default Swaps NBFCs as users

Revision
in
External
Commercial
Borrowings (ECB) Policy Infrastructure
Finance Companies (IFCs)
Guidelines on classification of frauds,
approach towards monitoring of and
reporting system for frauds for deposit
taking NBFCs to apply for NBFC-ND-SI
also.

04-05-2013

ICAI-Delhi
Bhavesh Vora

CA

46

Non Banking
Finance
Company
ICAI-DELHI

04-05-2013

Bhavesh Vora

CA

47