RBI Suggests Tighter Regulation of NBFCs
By: Jay Parikh, Bharucha & Partners
September 09, 2011 / 10:28 IST
By: Jay Parikh, Senior Associate, Bharucha & Partners
The RBI released the Report of the Working Group on the Issues and Concerns in the NBFC Sector (Report) on 29 August 2011. The Working Group, chaired by Usha Thorat, was constituted by RBI with a mandate to review the existing regulatory and supervisory framework of NBFCs with a special focus on the risks in the NBFC sector. Very broadly, the Report seeks alignment of the laws and regulations governing NBFCs with those governing banks in India.Some important recommendations made in the Report are:1. The minimum net owned fund (NOF) requirement for all new NBFCs wanting to register with the RBI could be retained at the present Rs. 2 crores till the RBI Act is amended. NBFCs with an asset size of less than Rs. 50 crores shall not require registration. Also, NBFCs not accessing public funds may be exempted from registration provided their assets are below Rs. 1000 crore; 2. The twin-criterion of assets and income, laid down by RBI in April 1999, for determining the principal business of an NBFC should be increased to 75 per cent of the total asset and 75 per cent of the total income, respectively. A time period of three years may be given to fulfil revised principal business criteria; 3. Any transfer of shareholding, direct or indirect, of 25 per cent and above, change in control, merger or acquisition of any registered NBFC should have prior approval of RBI; 4. Tier I capital for Capital to Risk Weighted Assets Ratio (CRAR) purposes may be specified at 12 per cent to be achieved in three years for all registered deposit taking and non-deposit taking NBFCs; 5. Liquidity ratio may be introduced for all registered NBFCs such that cash, bank balances and holdings of government securities fully cover the gaps, if any, between cumulative outflows and cumulative inflows for the first 30 days; 6. Asset classification and provisioning norms similar to banks to be brought in phased manner for NBFCs. Suitable income tax deduction akin to banks may be allowed for provisions made under the regulations. Accounting norms applicable to banks may be applied to NBFCs; 7. Board approved limits for bank
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