CHAPTER 19

NON-BANKING FINANCE COMPANIES – NBFC’s

Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 (Rule 1 to 7)

NBFC’s & Notified Entities Regulations, 2008 (Regulations 2, 3, 9, 10, 15B, 16-18, 25)
What is a NBFC / NBFI

Examples of NBFCs

Contribution in Our Economy

What Rules Govern NBFC

Who is Regulator of NBFC

Notified Entity
“Consumer Financing” financing to individuals for personal, family or household needs

“Consumer Leasing” leasing to individuals for personal, family or household needs;

“Contingent Liabilities” mean, - (a) a possible obligation that arises from past events, the
existence of which will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the entity.

“Exposure” includes investment in securities, debt instruments, placements, deposits with

Financial Institutions, etc.
Non-banking Finance Companies and Notified Entities Regulations, 2008
Regulation 09: NBFCs to ensure prevention of money laundering & other illegal trades.
Determine true identity of prospective customer or investor before extending its services
i. accept money after account opened in name of customer using account opening form developed by
respective industry associations in consultation with Commission;
ii. establish procedures for obtaining identification of new customers and ensure that no business with
those who do not provide identity;
iii. conduct business in conformity with Rules & these Regulations & shall not offer illegal services.
iv. monitor accounts regularly, checking identities of remitters & and beneficiaries of transactions and
retain record
v. not to make or receive amounts in cash exceeding Rs.50,000/-.

Above limit shall not apply to cash payments made for repayment of Finance by an existing borrower
Appointment or Re-appointment of Directors and Chief Executives
Within 10 days of election of Directors, NBFC shall apply for appointment of CE.

in case of casual vacancy of Director or Chief Executive, NBFC apply to Commission in 10 days

if CE is removed / resigns, NBFC shall immediately inform Commission along with reasons.

NBFC within 10 days submit an application to Commission for appointment of new CE.

Application to be as per Schedule IX

Deficiency in information submitted by NBFC to Commission be rectified within 14 days

Limit on Aggregate Liabilities of NBFC.- (Regulation 15B)
(1) Aggregate liabilities, excluding contingent liabilities & security deposits, of a non-deposit
taking NBFC shall not exceed 10 times of its equity.

(2) Contingent Liabilities of NBFC shall not exceed limits prescribed below:
Credit Rating Maximum Limit
AA- and above 2 times of equity
A- to A+ 1.5 times of equity
BBB+ 0.5 times of equity
Creation of Reserve Fund.– (Regulation 16)
A deposit taking & lending NBFC shall create reserve wherein at least 20% of after tax profits
be credited till reserve equals paid up capital.
Thereafter not less than 5% of after tax profits be credited to reserve.
Bonus shares may be issued from reserve however NBFC shall transfer further amounts to
reserve in order to comply with requirements of Regulation (16).
Maximum Exposure of NBFC to a single person, or Group.- (Regulation 17)
(1) Total outstanding Exposure by NBFC to a person not to exceed 20% of equity.
Maximum fund based Exposure does not exceed 15% of equity.
NBFC which exclusively issues guarantees to enhance quality of debt issued to finance
infrastructure projects, outstanding Exposure (fund based & non-fund) shall not exceed 40%.
This relaxation shall be applicable to the NBFC:
(i) for first 5 years of its operations
(2) Total outstanding Exposure by NBFC to any group not to exceed 25% of equity.

Maximum outstanding fund-based Exposure does not exceed 20% of equity.

Limits in (1) & (2) above are not applicable to exposure taken by NBFC in its subsidiaries.

NBFC engaged exclusively in issuance of guarantees to enhance quality of debt instruments

issued to finance infrastructure projects, total outstanding Exposure to any group shall not
exceed 50% of equity:
This relaxation is applicable:
(i) for first 5 years of its operations; and
(ii) for total outstanding Exposure in relation to finance raised otherwise from public
In case of micro financing, following Exposure limits shall be applicable:
(a) Poor Person:
Rs.1,500,000 for housing loan; Rs.500,000 for general loan;
(b) Microenterprise Rs.1,500,000

(4) Exposure shall be calculated as under, -

(a) 100% of deposits placed with lending NBFC, under perfected lien, shall be deducted from Exposure;
(b) 90% of following shall be deducted from Exposure, -
(i) deposits with any financial institution; and
(ii) Government Securities & National Saving Scheme securities deposited by Borrower, as collateral;
(c) 85% of unconditional financial guarantees, issued by banks, as collateral
(d) 30% of Term Finance Certificate & Sukuks & shares of KSE 100 index companies held as security
(e) 75% of Encashment Value of Life Policy, submitted with NBFC as collateral
Maintenance of Capital Adequacy Ratio (‘CAR’).- (Regulation 17A)
A deposit taking NBFC shall maintain CAR of 8% for first 2 years and 10% for subsequent years.

Asset Liability Management System. – (Regulation 17B)

BoD of a deposit taking NBFC shall approve policy for effective monitoring of assets & liabilities.

Exposure Limits in Capital Market.- (Regulation 17C)

(1) NBFC’s aggregate exposure in listed equity securities shall not exceed 50% of its equity.
Provided that above condition shall not be applicable on non-deposit taking NBFCs.
(2) NBFC’s investment in equity of any company shall not exceed 10% of paid-up capital of investee
company or 10% of its own equity, whichever is less.
Above restriction not to apply to investments by NBFC in its own subsidiaries.
For purpose of this Regulation “investments in equity securities” shall be valued at cost of acquisition.
Classification and Provisioning for Non-Performing Assets. (Regulation 25)
(1) Lending NBFC shall classify its assets & provisioning as per Schedule X.
After adoption & implementation of IFRS 9, its requirements shall be applicable.
(2) In addition to time based criteria provided in Schedule X subjective evaluation of performing and
non-performing Finance shall be made for risk assessment.
IFRS 9 specifies how an entity should classify and measure financial assets, financial liabilities, and some
contracts to buy or sell non-financial items.

(4) Classification of a rescheduled non-performing Finance is not changed due to rescheduling.

(5) If Borrower defaults after rescheduling NBFC shall classify it in same category as it was originally.

(6) At time of rescheduling, NBFC shall reconsider viability of project & conduct due diligence.
(7) Lending NBFC shall take benefit of realizable value of assets held as collateral

(8) Subjective evaluation of investment portfolio be carried out by the NBFC.

(9) NBFC shall review, at least quarterly, the recovery of their Finance portfolio & document evaluations.

(10) External auditors of NBFC shall verify all requirements under these Regulations for classification of assets.