NBFCs told to stop loans to directors, relatives

The Reserve Bank of India (RBI) has banned non-banking financial companies (NBFCs) from extending loans to its directors and their relatives to eliminate any conflict of interest in the lending operations of the finance companies.

This directive is part of the corporate governance guidelines for NBFCs issued by the RBI.

The NBFCs with deposit size of Rs 20 crore or more and non-deposit taking NBFCs with assets of Rs 100 crore and above also cannot provide any non-fund based facility or any other financial accommodation to firms in which directors hold interest as partner or guarantor.

In case of loans extended to directors without any repayment date, the RBI directed the NBFCs to recover them within one year.

In other cases, the NBFCs will be required to recover the loan with interest as soon as it falls due for repayment.

The RBI also asked the NBFCs to submit a quarterly statement about the loans and advances granted to their directors, relatives and other entities within 15 days from the close of the quarter.

The RBI laid out the guidelines to ensure greater transparency in the operations of NBFCs and adoption of best practices. It has asked the deposit taking NBFCs to establish 'fit and proper' status of proposed as well existing directors.

The deposit taking NBFCs are also required to establish audit committees with minimum three board members.

Till now this applied only to NBFCs having assets of Rs. 50 crore and above.

To manage integrated risks, the central bank has directed NBFCs to establish risk management committees.

This is in addition to the existing asset liability panels which monitor asset liability gaps and work to reduce associated risks.