1. Non Banking Finance Company ICAI-DELHI
CA Bhavesh Vora

2. 04-05-2013 ICAI-Delhi CA Bhavesh Vora
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
ICAI-Delhi CA Bhavesh Vora

3. 04-05-2013 ICAI-Delhi CA Bhavesh Vora
Topics Covered
Other Important Norms
Auditor’s Report Directions, 2008
Returns Requirements
Core Investment Companies (CICs)
Formation Procedure
Recent Amendments
ICAI-Delhi CA Bhavesh Vora

4. 04-05-2013 ICAI-Delhi CA Bhavesh Vora
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 Payment and Settlement Mechanism
ICAI-Delhi CA Bhavesh Vora

5. 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
ICAI-Delhi CA Bhavesh Vora

6. 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
ICAI-Delhi CA Bhavesh Vora

7. 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.
The onus of including only eligible assets for the purpose of classification as AFC shall be that of the company concerned.
Principal business - aggregate of financing real/physical assets supporting
economic activity and income arising therefrom is not less than 60% of
its total assets and total income respectively
ICAI-Delhi CA Bhavesh Vora

8. Classification of NBFCs……
Investment Companies (IC) means any company which is
a financial institution carrying on as its principal business
of acquisition of securities
Loan Companies (LC) means any company which is a
financial institution carrying on as its principal business the
providing of finance whether by making loans or advances
or otherwise for any activity other than its own but does
not include an Asset Finance Company
ICAI-Delhi CA Bhavesh Vora

9. 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
ICAI-Delhi CA Bhavesh Vora

10. Capital Adequacy Capital to risk assets ratio (CRAR) in case of
NBFC-ND-SI shall not be less than 15%
ICAI-Delhi CA Bhavesh Vora 10

11. 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)
TRWA = Total Risk weighted assets of B/S and Off balance sheet items
CRAR = (Tier I+Tier II)/TRWA
ICAI-Delhi CA Bhavesh Vora 11

12. 04-05-2013 ICAI-Delhi CA Bhavesh Vora
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
ICAI-Delhi CA Bhavesh Vora

13. The Resultant Figure will be “Owned Funds”
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”
ICAI-Delhi CA Bhavesh Vora

14. 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)
ICAI-Delhi CA Bhavesh Vora

15. 04-05-2013 ICAI-Delhi CA Bhavesh Vora
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)
ICAI-Delhi CA Bhavesh Vora

16. 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
ICAI-Delhi CA Bhavesh Vora

17. Calculation of Risk Assets
Weights assigned as below
Asset
Weight
Amount
Weighted Amt
Fixed Assets
100
500
Bonds of Public Sector Banks 20
Investment in PDI of NBFCs
100/0
Shares/Debenture/CPs/Bonds
Cash and Bank
ICAI-Delhi CA Bhavesh Vora

18. Calculation of Risk Assets
Weight
Amount
Weighted Amt
Stock on Hire
100
500
Inter Corporate Loans/Deposits
Loans to staff 50
Other Secured loans and Adv
200
Total
2800
ICAI-Delhi CA Bhavesh Vora

19. 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.
ICAI-Delhi CA Bhavesh Vora

20. 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’
ICAI-Delhi CA Bhavesh Vora

21. 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
ICAI-Delhi CA Bhavesh Vora

22. 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
ICAI-Delhi CA Bhavesh Vora

23. 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 non-banking 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.
ICAI-Delhi CA Bhavesh Vora

24. Provisioning Norms Classification of Assets Standard Assets
Interest and Principal Repayment
are regular
Sub-standard assets
Doubtful Assets
Loss Assets
Non performing assets (NPA) – Interest
/Pripcipal outstanding for more than six months
ICAI-Delhi CA Bhavesh Vora

25. 04-05-2013 ICAI-Delhi CA Bhavesh Vora
Provisioning Norms…
Standard Assets
0.25% of standard assets (Notification dated 17th January, 2011)
Sub standard assets
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%
ICAI-Delhi CA Bhavesh Vora

26. 04-05-2013 ICAI-Delhi CA 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)
ICAI-Delhi CA Bhavesh Vora

27. Other Important Norms.. (All NBFCs)
Certain disclosures should be made in the Balance sheet as per format prescribed
Provisions for bad and doubtful debts
Provisions for depreciation in investments
Disclosure in balance sheet only for NBFC-ND-SI
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)
ICAI-Delhi CA Bhavesh Vora

28. 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 finalisation of the balance sheet not later than 30th Dec. in any case
"Every non-banking financial company
shall finalise its balance sheet within a period of
3 months from the date to which it pertains"
ICAI-Delhi CA Bhavesh Vora 28

29. more than 50 per cent of the gross income
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.
Fixed Deposits with Banks are not considered as Financial Assets (RBI Notification no. 259)
Financial Assets are more than 50 per cent
of its Total Assets (netted off by Intangible Assets)
AND
Income from financial assets should be
more than 50 per cent of the gross income 29

30. For Attention of Auditors:
Auditor’s 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
ICAI-Delhi CA Bhavesh Vora 30

31. 04-05-2013 ICAI-Delhi CA Bhavesh Vora
Auditor’s Report…
Matters to be included in the auditor’s report
The auditor’s 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
ICAI-Delhi CA Bhavesh Vora 31

32. 04-05-2013 ICAI-Delhi CA Bhavesh Vora
Auditor’s Report…
II. In the case of a company holding CoR issued by the Bank, whether that company is entitled to continue to hold such CoR in 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.
ICAI-Delhi CA Bhavesh Vora 32

33. 04-05-2013 ICAI-Delhi CA Bhavesh Vora
Auditor’s Report…
In the case of an NBFC-ND
The auditor shall include a statement on: -
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
ICAI-Delhi CA Bhavesh Vora 33

34. 04-05-2013 ICAI-Delhi CA Bhavesh Vora
Auditor’s Report…
Additional Reporting in respect of NBFC-ND-SI
(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
ICAI-Delhi CA Bhavesh Vora 34

35. 04-05-2013 ICAI-Delhi CA Bhavesh Vora
Auditor’s Report…
Other Requirements:
Reasons to be stated for unfavourable or qualified statements
Obligation of auditor to submit an exception report to the Bank (RBI)
Auditor to make a report to the regional office containing the details of unfavorable or qualified statements and about the non-compliance, as the case may be, in respect of the company
ICAI-Delhi CA Bhavesh Vora 35

36. 04-05-2013 ICAI-Delhi CA Bhavesh Vora
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
ICAI-Delhi CA Bhavesh Vora

37. Returns Requirements.cont…
Quarterly return on important financial parameters for NBFC having asset size between 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.
ICAI-Delhi CA Bhavesh Vora

38. 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 specified acts
CIC is considered SI only if raising/holding public funds
AND Total Assets of Rs. 100 crore or above
ICAI-Delhi CA Bhavesh Vora

39. 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)
ICAI-Delhi CA Bhavesh Vora

40. 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
ICAI-Delhi CA Bhavesh Vora

41. 04-05-2013 ICAI-Delhi CA Bhavesh Vora
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.
ICAI-Delhi CA Bhavesh Vora 41

42. 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.
ICAI-Delhi CA Bhavesh Vora 42

43. 04-05-2013 ICAI-Delhi CA Bhavesh Vora
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
ICAI-Delhi CA Bhavesh Vora

44. 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
ICAI-Delhi CA Bhavesh Vora

45. 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”
ICAI-Delhi CA Bhavesh Vora

46. 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.
ICAI-Delhi CA Bhavesh Vora

47. Non Banking Finance Company ICAI-DELHI
CA Bhavesh Vora