Proposed changes to NBFC Regs

Pursuant to the Usha Thorat Committee report, the RBI has proposed wide-ranging amendments to the NBFC regulations. In order to adopt a consultative approach, the RBI has placed on its website, the draft guidelines to address issues and concerns in the NBFC sector. 

The draft revised guidelines relate to entry point norms, principal business criteria, prudential regulations, liquidity requirements for NBFCs and corporate governance. While accepting some of the suggestions, the RBI has proposed additional time to bring the new regulatory framework into existence. My colleague, Mr. Jayant Thakur has commented on the proposed changes elsewhere.

NBFC regime continuous to be uncertain

My learned colleague Mr. Jayant Thakur has in his blog post analyzed the recent RBI circular I referred to earlier, which states that fixed deposits with banks do not count as financial assets for the purposes of NBFC regulations. Mr. Thakur's post goes on to examine the impact of this circular on existing NBFCs and other entities. I quote:


"this will create confusion to existing NBFCs already engaged in the business of finance. Bank Deposits are part of the portfolio of any NBFC. It may be recollected that the RBI had, vide its circular dated October 19, 2006, created a deeming condition regarding when a Company becomes an NBFC. It stated that, for a Company to qualify as an NBFC, at least 50% of its assets should be financial assets and 50% of its income should be from financial assets. If bank fixed deposits are excluded as financial assets for all companies, it may create problems for some NBFCs particularly in lean times and their auditors may have to qualify their reports.

And this circular may help out those companies who unwittingly became NBFCs on account when at a year end, they found that their assets consisted of financial assets including fixed deposits with banks being more than 50%. Since bank FDs are no more treated as financial assets, they may escape one or both of the conditions and thus escape the deeming provision which otherwise may have resulted in their requiring to apply for registration as NBFC."


The uncertainty created around the certificate of registration is also undesirable. Mr. Thakur has referred to the Usha Thorat Committee report which has made various liberal and realistic recommendations, which has not seen the light of day - I will write on this report soon. In contrast to the same, these measures seem quite retrograde in nature. Comments from readers welcome.

Dormant NBFCs under RBI scanner

There are numerous NBFCs who have obtained registration from the RBI, parked their funds in fixed deposits with commercial banks but have not commenced NBFC activities for several years thereafter. In view of the recent difficulty in getting NBFC registrations as well as to get the benefit of lower net owned funds (NOF) requirements (in case the NBFC was registered pre-1999), acquiring such inactive/ dormant NBFCs had almost become the norm for entities wishing to enter the financial services' space in India.

The RBI has by way of a recent notification attempted to plug this loophole. The regulator has clarified that it issues a Certificate of Registration (CoR) for the specific purpose of conducting NBFI activities. Investments in fixed deposits cannot be treated as financial assets and receipt of interest income on fixed deposits with banks cannot be treated as income from financial assets as these are not covered under the activities mentioned in the definition of “financial Institution” in Section 45I(c) of the RBI Act 1934. Besides, bank deposits constitute near money and can be used only for temporary parking of idle funds, and/or in the above cases, till commencement of NBFI business. The RBI has directed that a NBFC which is in receipt of a CoR from the Bank must necessarily commence NBFC business within 6 months of obtaining CoR. If the business of NBFC is not commenced by the company within such a  period, the CoR will stand withdrawn automatically. Further, there can be no change in ownership of the NBFC prior to commencement of business and regularization of its CoR.

This blog will track developments in laws/ regulations relating to NBFCs. Please follow and needless to mention, I am happy to receive comments/ feedback on practical experiences readers have had with the regulator.