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In a bid to bring non-banking financial company (NBFC) norms in line with those of banks, the Reserve Bank of India (RBI) on Monday unleashed tighter rules for NBFCs. According to the new guidelines, NBFCs will require higher minimum capital, have less time to declare bad loans, and a board-approved fit and proper criteria for director appointments.
The new norms, which will be implemented in a phased manner, are made applicable for NBFCs that manage funds worth Rs 500 crore and for those that accept public deposits. The central bank will also start granting fresh NBFC licences.
"A lighter regulatory framework has been placed on NBFCs other than for those with large asset sizes and deposit accepting. For NBFCs with large asset sizes, and for all deposit-accepting NBFCs, regulations have been harmonised across NBFCs, and to some extent, with banks," said RBI, adding that the intent was to create a level-playing field that does not unduly favour any institution. (QUICK COMPARISON OF NBFC NORMS)
To harmonise the deposit acceptance regulations across all deposit-taking NBFCs (NBFCs-D) and move to a regime of only credit-rated NBFCs-D accessing public deposits, existing unrated asset finance companies (AFCs) have been asked to get themselves rated by March 31, 2016. "Those AFCs that do not get an investment grade rating by March 31, 2016, will not be allowed to renew existing or accept fresh deposits thereafter," RBI noted.
According to current regulations, an asset is classified as non-performing when it remains overdue for six months or more for loans and overdue for 12 months or more in case of lease rental and hire-purchase instalments, compared with 90 days for banks.
The new norms proposed to reduce the period in a phased manner so that the norms are at par with banks by March 31, 2018.
In the past, NBFCs had opposed this on two grounds. One, their borrowers generally come from the unorganised and informal sections of the economy. There are often some difficulties in repayment of due to issues such as fuel cost increase, insurance and so forth but this doesn't essentially translate into default. Also, NBFCs don't get any tax benefit on their provisioning, while banks do.
Vibha Batra, senior vice-president and co-head (financial sector rating) at ICRA, said the revised norms are balanced but there would be short-term pain. "The economy is picking up and the regulator has a long transition period to meet stringent asset quality norms," she said.
Similarly, provisioning for standard assets, which is 0.25 per cent for NBFCs now, is proposed to be increased to 0.40 per cent by March 2018, in line with banks.
On capital, however, larger and deposit-taking NBFCs will have to increase their minimum tier-1 capital adequacy ratio to 10 per cent by March 2017, from 7.5 per cent now. The overall capital adequacy ratio (asset size of Rs 100 crore), has been retained at 15 per cent.
The regulator has also tightened the corporate governance and disclosure norms for NBFCs. Besides that, RBI said NBFCs that are part of a corporate group or are floated by a common set of promoters, will not be viewed on a standalone basis.
On directors' appointment, RBI said: "NBFCs shall ensure there is a policy put in place for ascertaining the fit and proper criteria at the time of appointment of directors and on a continuing basis."
The minimum net worth for NBFCs, which were granted licences before 1999, was retained at Rs 25 lakh. Now, all NBFCs are to attain a minimum net-owned funds of Rs 2 crore by March 2017.
RBI has also asked for application of enhanced prudential regulations to NBFCs, wherever public funds are accepted and conduct of business regulations will be made applicable wherever customer interface is involved.
