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RBI/2013-14/46
DNBS(PD).CC.No 344./03.02.001/2013-14
DNBS(PD).CC.No 344./03.02.001/2013-14
July 1, 2013
To,
All Non-Banking Financial Companies (NBFCs)
Dear Sirs,
Master Circulars - Miscellaneous Instructions to All Non-Banking Financial Companies
In order to have all current instructions in one place, the
Reserve Bank of India has issued master circulars to NBFCs on various
subjects. It is advised that Miscellaneous Directions / Instructions
issued upto June 30, 2013, which do not find a place in such master
circulars have been compiled herein. A consolidated list of all such
instructions is enclosed for ready reference. The Master circular has also been placed on the RBI web-site (http://www.rbi.org.in).
Yours faithfully,
(N. S. Vishwanathan)
Principal Chief General Manager
Principal Chief General Manager
It was decided to introduce an ALM System for the Non-Banking
Financial Companies (NBFCs), as part of their overall system for
effective risk management in their various portfolios. The
abovementioned guidelines would be applicable to all the NBFCs
irrespective of whether they are accepting / holding public deposits or
not. However to begin with, NBFCs (engaged in and classified as
equipment leasing, hire purchase finance, loan, investment and
residuary non-banking companies) meeting the criteria of asset base of
Rs.100 crore (whether accepting / holding public deposits or not) or
holding public deposits of Rs. 20 crore or more (irrespective of their
asset size) as per their audited balance sheet as of 31 March 2001
would be required to put in place the ALM System.
A system of half yearly reporting was put in place in this
regard and the first Asset Liability Management return as on 30
September 2002 was to be submitted to RBI by only those NBFCs which are
holding public deposits within a month of close of the relevant half
year i.e., before 31 October 2002 and continue thereafter in similar
manner. The half yearly returns would comprise of three parts :
(i) Statement of structural liquidity in format ALM
(ii) Statement of short term dynamic liquidity in format ALM and
(iii) Statement of Interest Rate Sensitivity in format ALM.
In the case of companies not holding public deposits, separate
supervisory arrangements would be made and advised in due course of
time.
In terms of Section 45QB of the RBI Act, the depositor/s of
NBFCs may nominate, in the manner prescribed under the rules made by
the Central Government under Section 45ZA of the Banking Regulation
Act, 1949 (B.R.Act). one person to whom, in
the event of death of the depositor/s, the amount of deposit may be
returned by the NBFC. It has been decided in consultation with the
Government of India, that the Banking Companies (Nomination) Rules, 1985
are the relevant rules made under Section 45ZA of the B. R. Act. A
copy of the rules is enclosed. Accordingly, NBFCs may accept
nominations made by the depositors in the form similar to that
specified under the said rules.
NBFCs including RNBCs are required to maintain liquid assets in
the form of Government securities / guaranteed bonds as per the
provisions of Section 45-IB of the RBI Act and lodge such securities in
a Constituents' Subsidiary General Ledger (CSGL) Account with a
scheduled commercial bank (SCB) / Stock Holding Corporation of India
Ltd., (SHCIL) or in a demat account with a depository through a
depository participant (DP) registered with Securities & Exchange
Board of India (SEBI) or with a branch of SCB to the extent such
securities are yet to be dematerialised.
In order to protect the interest of depositors, an exclusive
CSGL or demat account to hold Government securities shall be maintained
for securities held for the purpose of compliance with Section 45-IB
of the RBI Act. This account should be operated only for purchase or
sale of securities due to increase or decrease in the quantum of public
deposits or withdrawal of securities for encashment on maturity or for
repayment to depositors in special circumstances, and not be used to
undertake repo or other transactions.
In case an NBFC (including RNBC) deals in the government
securities in a manner other than that permitted above, another CSGL
account may be opened for this purpose.
It is also observed that some of the NBFCs have either not
dematerialised the government securities or have dematerialized but
failed to report the same to the RBI. For this purpose the quarterly
liquid asset return in the reporting formats of NBS 3 and NBS 3A has
been amended to include the information about the demat accounts, which
will ensure that the information in this regard is not omitted by
NBFCs.
It may be possible that there may be a few Government
securities / Government guaranteed bonds that have not been
dematerialized and are held in physical form which for the purpose of
collection of interest are withdrawn from the safe custody with their
designated bankers and re-deposited with the banks after collection of
interest. To avoid the process of withdrawal and re-depositing the same
it has now been decided that NBFCs / RNBCs shall authorize the
designated banks as agents for collection of interest on due dates on
these securities held in physical form and lodged for safe custody.
NBFCs / RNBCs may approach their designated banker and exercise a Power
of Attorney in favour of the designated bank to enable it to collect
interest on the securities / guaranteed bonds held in physical form on
the due date.
In terms of paragraph 9B of Non Banking Financial Companies
Prudential Norms (Reserve Bank) Directions, 1998 NBFCs are to prepare
the Balance Sheet and profit and loss account as on March 31 every
year. Whenever an NBFC intends to extend the date of its Balance Sheet
as per provisions of the Companies Act, it should take prior approval
of the RBI before approaching the ROC for this purpose. It may,
however, be clarified that even in the cases where RBI and ROC grant
extension of time, the company would be required to furnish to RBI a
Proforma Balance Sheet (unaudited ) as on March 31 of the year and the
statutory returns due on the above date.
5. Certificate of
Registration (CoR) issued under Section 45-IA of the RBI Act, 1934 -
Continuation of business of NBFI - Submission of Statutory Auditors
Certificate - Clarification
It has been observed that there are NBFCs which are no longer
engaged in the business of NBFI and hence are not required / eligible
to hold the CoR granted by RBI. but still continue to do so. In order
to ensure that CoRs are only held by NBFCs which are actually engaged
in the business of NBFI, all NBFCs should submit a certificate from
their Statutory Auditors every year to the effect that they continue to
undertake the business of NBFI requiring holding of CoR under Section
45-IA of the RBI Act, 1934.
It is clarified that the business of non-banking financial
institution (NBFI) means a company engaged in the business of financial
institution as contained in Section 45I(a) of the RBI Act, 1934. For
this purpose, the definition of 'Principal Business' given, vide Press
Release 1998-99/1269 dated April 8, 1999 may be followed.
Non- Reckoning Fixed Deposits with Banks as Financial Assets
It was clarified, that the Reserve Bank issues a Certificate
of Registration 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.
In addition, the NBFC which is in receipt of a CoR from the
Bank must necessarily commence NBFC business within six months of
obtaining CoR. If the business of NBFC is not commenced by the company
within the period of six months from the date of issue of CoR, 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
6. Operative instructions
relating to relaxation / modification in Ready Forward Contracts,
Settlement of Government Securities Transactions and Sale of securities
allotted in Primary Issues
All NBFCs / RNBCs are instructed to follow the guidelines on transactions in Government Securities as given in the circular IDMD.PDRS.05/10.02.01/2003-04 dated March 29, 2004 meticulously, wherever applicable. The revised guidelines come into effect from April 2, 2004.
All NBFCs including RNBCs may refer to the circular IDMD.PDRS.4777, 4779 & 4783/10.02.01/2004-05 all dated May 11, 2005
addressed to all RBI regulated entities. All NBFCs / RNBCs are
instructed to follow the guidelines on transactions in Government
Securities as given in the circulars meticulously, wherever applicable.
In cases of doubt they may refer to IDMD.
SEBI has permitted FIMMDA to set up its reporting platform for
corporate bonds. It has also been mandated to aggregate the trades
reported on its platform as well as those reported on BSE and NSE with
appropriate value addition.
All NBFCs would be required to report their secondary market
transactions in corporate bonds done in OTC market, on FIMMDA's
reporting platform with effect from September 1, 2007. Detailed
operational guidelines in this regard would be issued by FIMMDA. In the
meanwhile, the NBFCs may approach FIMMDA directly for participating in
the mock reporting sessions.
Need for public notice before (a) Closure of the Branch / Office by any NBFC (b) Sale / Transfer of Ownership by an NBFC
(a) NBFC should give at least three months public notice prior
to the date of closure of any of its branches / offices in, at least,
one leading national news paper and a leading local (covering the place
of branch / office) vernacular language newspaper indicating therein
the purpose and arrangements being made to service the depositors etc.
(b) (i) A public notice of 30 days shall be given before
effecting the sale of, or transfer of the ownership by sale of shares,
or transfer of control, whether with or without sale of shares. Such
public notice shall be given by the NBFC and also by the transferor, or
the transferee or jointly by the parties concerned.
For this purpose, the term 'control' shall have the same
meaning as defined in Regulation 2(1)(c) of the Securities and Exchange
Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997.
(ii) The public notice should indicate the intention to sell
or transfer ownership / control, the particulars of transferee and the
reasons for such sale or transfer of ownership / control. The notice
should be published in one leading national and another in leading
local (covering the place of registered office) vernacular language
newspaper.
It has been observed that the change in management also takes
place by way of amalgamation / merger of an NBFC with another NBFC or a
non-financial company and as such, these mergers / amalgamations would
tantamount to the change in the management, as aforesaid.
It would be obligatory on the part of such an NBFC seeking
change in management or merger or amalgamation with any other company
to give an option to every depositor to decide whether to continue the
deposits with the company under the new management or the transferee
company or not. The company would also be obliged to make the payment
to the depositors who seek the repayment of their deposits. The Bank
would view the non-compliance of the above instructions very seriously
and penal action would be initiated against the defaulter company on
the merits of each case.
The following changes are effected in the above instructions in January 2006 :
(i) Merger and Amalgamation in terms of the High Court Order
(a) Where merger and amalgamation takes place in terms of the
High Court order in pursuance of Sections 391 and 394 of the Companies
Act 1956, the company shall inform the Bank about merger or
amalgamation along with Court's order approving the same within a
period of one month from the date of the order. As the public notice is
given by the companies under the Companies Act 1956 and Rules made
thereunder, no further public notice is required to be given by the
companies in terms of the Bank's Circular as mentioned above.
(b) However there will be no change in other instructions contained in paragraph 5(iii) (b) of the Company Circular DNBS(PD).CC.No.12/02.01/99-2000 dated January 13, 2000.
10. The Non-Banking Financial Companies (Deposit Accepting) (Approval of Acquisition or Transfer of Control) Directions, 2009.
In exercise of the powers conferred by sections 45K and 45L of
the Reserve Bank of India Act, 1934 (2 of 1934) and of all the powers
enabling it in this behalf, Reserve Bank of India having considered it
necessary in the public interest and being satisfied that for the
purpose of enabling the Bank to regulate the credit system to the
advantage of the country, it is necessary so to do, gives to every
deposit taking NBFC the Directions hereinafter specified.
Short title and commencement of the Directions
1. (1) These Directions shall be known as the Non-Banking
Financial Companies (Deposit Accepting) (Approval of Acquisition or
Transfer of Control) Directions, 2009.
(2) These Directions shall come into force with immediate effect.
Definitions
2. For the purpose of these Directions, unless the context otherwise requires, -
(a) "control" shall have the same meaning as is assigned to it
under clause (c) of sub-regulation (1) of regulation 2 of Securities
and Exchange Board of India (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997.
(b) "NBFC" means non-banking financial company as defined in
clause (xi) of sub-paragraph (1) of Paragraph 2 of Non-Banking
Financial Companies Acceptance of Public Deposits (Reserve Bank)
Directions, 1998.
Prior approval of RBI in cases of acquisition or transfer of control of deposit taking NBFCs
Any takeover or acquisition of control of a deposit taking
NBFC, whether by acquisition of shares or otherwise, or any merger /
amalgamation of a deposit taking NBFC with another entity, or any
merger / amalgamation of an entity with a deposit taking NBFC, shall
require prior written approval of Reserve Bank of India.
Application of other laws not barred
The provisions of these Directions shall be in addition to, and
not in derogation of the provisions of any other law, rules,
regulations or directions, for the time being in force.
Exemptions
The Reserve Bank of India may, if it considers necessary for
avoiding any hardship or for any other just and sufficient reason,
exempt any NBFC or class of NBFCs, from all or any of the provisions of
these Directions either generally or for any specified period, subject
to such conditions as the Reserve Bank of India may impose.
(ii) Other cases
Where merger and amalgamation or change in the management of
the company takes place upon sale / transfer otherwise than as stated
in sub-paragraph (i) above, the NBFCs (including RNBCs) (deposit taking
and non-deposit taking companies) should give prior public notice of 30
days.
11. Cover for public deposits - creation of floating charge on Liquid Assets by deposit taking NBFCs
NBFCs raise funds for their operations from various sources
like public deposits, bank borrowings, inter-corporate deposits,
secured / unsecured debentures, etc.
In order to ensure protection of depositors interest, NBFCs
should ensure that at all times there is full cover available for
public deposits accepted by them. While calculating this cover the
value of all debentures (secured and unsecured) and outside liabilities
other than the aggregate liabilities to depositors may be deducted
from the total assets. Further, the assets should be evaluated at their
book value or realizable / market value whichever is lower for this
purpose. It shall be incumbent upon the NBFC concerned to inform the
Regional Office of the Reserve Bank in case the asset cover calculated
as above falls short of the liability on account of public deposits.
NBFCs accepting/holding public deposits were directed to create a
floating charge on the statutory liquid assets invested in terms of
Section 45-IB of the RBI Act, 1934, in favour of their depositors. Such
charge should be duly registered in accordance with the requirements
of the Companies Act, 1956.
In view of the practical difficulties expressed by the NBFCs in
creating charge on the statutory liquid assets in favour of large
number of depositors, it was subsequently decided that NBFCs accepting /
holding public deposits may create the floating charge on the
statutory liquid assets maintained in terms of Section 45-IB of the RBI
Act, 1934 and notifications issued by the Bank from time to time, in
favour of their depositors through the mechanism of 'Trust Deed'.
It is an emerging practice in India to engage agents /
outsource business operations for the purpose of soliciting or
promoting any commercial transactions using telecommunication mode.
There is a need to protect the right to privacy of the members of
public and to curb the complaints relating to unsolicited commercial
communications being received by customers / non-customers, as part of
best business practices.
Telecom Regulatory Authority of India (TRAI) has framed the
Telecom Unsolicited Commercial Communications (UCC) Regulations for
curbing UCC. Further, the Department of Telecommunications (DoT) has
issued relevant guidelines for telemarketers alongwith the registration
procedure on June 6, 2007. These guidelines have made it mandatory for
telemarketers to register themselves with DoT or any other agency
authorized by DoT and also specified that the telemarketers shall
comply with the Guidelines and Orders / Directions issued by DoT and
Orders / Directions / Regulations issued by Telecom Regulatory
Authority of India (TRAI) on Unsolicited Commercial
Communications(UCC). The detailed procedure in this regard is also
available on TRAI's website (www.trai.gov.in).
NBFCs are therefore; advised
(i) not to engage Telemarketers (DSAs / DMAs) who do not have
any valid registration certificate from DoT, Govt of India, as
telemarketers;
(ii) to furnish the list of Telemarketers (DSAs/DMAs) engaged
by them along with the registered telephone numbers being used by them
for making telemarketing calls to TRAI; and
(iii) to ensure that all agents presently engaged by them register themselves with DoT as telemarketers.
In accordance with the consultative approach adopted by the
Bank in framing of guidelines, a draft circular on enhancement of
minimum NOF level for deposit taking NBFCs was placed on web-site www.rbi.org.in on May 21, 2007.
The suggestions / comments received in this regard were
considered. To ensure a measured movement towards strengthening the
financials of all deposit taking NBFCs by increasing their NOF to a
minimum of Rs.200 lakh in a gradual, non-disruptive and
non-discriminatory manner, it has been decided to prescribe that :
(a) As a first step, NBFCs having minimum NOF of less than Rs.
200 lakh may freeze their deposits at the level currently held by
them.
(b) Further, Asset Finance Companies (AFC) having minimum
investment grade credit rating and CRAR of 12% may bring down public
deposits to a level that is 1.5 times their NOF while all other
companies may bring down their public deposits to a level equal to their
NOF by March 31, 2009.
(c) Those companies which are presently eligible to accept
public deposits upto a certain level, but have, for any reason, not
accepted deposits upto that level will be permitted to accept public
deposits upto the revised ceiling prescribed above.
(d) Companies on attaining the NOF of Rs.200 lakh may submit statutory auditor's certificate certifying its NOF.
(e) The NBFCs failing to achieve the prescribed ceiling within
the stipulated time period, may apply to the Reserve Bank for
appropriate dispensation in this regard which may be considered on case
to case basis.
In terms of Company Circular DNBS.PD.CC No.85/03.02.089/2006-07 dated December 06, 2006
it was advised that NBFCs financing real / physical assets for
productive / economic activity and to be classified as Asset Finance
Company (AFC) as per the criteria given under paragraph 4 of that
circular supported by
Statutory Auditors' certificate indicating the asset / income
pattern of the company as on March 31, 2006 latest by December 31, 2008
after which NBFCs which have not opted for the classification would be
deemed to be loan companies.
15. Monitoring Framework for non-deposit taking NBFCs with asset size of Rs 50 crore and above but less than Rs 100 crore
It was decided to call for basic information from non-deposit
taking NBFCs with asset size of Rs 50 crore and above but less than Rs
100 crore at quarterly intervals. The first such returns for the
quarter ended September 2008 were to be submitted by first week of
December 2008. The quarterly return as at the end of each quarter were
to be filed online with the Regional Office of the Department of
Non-Banking Supervision in whose jurisdiction the company was
registered, within a period of one month from the close of the quarter,
while the the procedure / system for online submission would be
conveyed at a later date.
Applicable NBFCs were later advised to submit the above return
as hard copy and soft copy (via e-mail in Excel format) to the Regional
Office of the Department of Non-Banking Supervision in whose
jurisdiction their company was registered, within a period of one month
from the close of the quarter, till the online procedure in this
regard is advised.
16. Accounting for taxes
on income - Accounting Standard 22 - Treatment of deferred tax assets
(DTA) and deferred tax liabilities (DTL) for computation of capital
As creation of DTA or DTL would give rise to certain issues
impacting the balance sheet of the company, it is clarified that the
regulatory treatment to be given to these issues are as under :-
- The balance in DTL account will not be eligible for
inclusion in Tier I or Tier II capital for capital adequacy purpose as
it is not an eligible item of capital.
- DTA will be treated as an intangible asset and should be deducted from Tier I Capital.
- NBFCs may keep the above clarifications in mind for all
regulatory requirements including computation of CRAR and ensure
compliance with effect from the accounting year ending March 31, 2009.
In this connection it is further clarified that
DTL created by debit to opening balance of Revenue Reserves or
to Profit and Loss Account for the current year should be included
under 'others' of "Other Liabilities and Provisions."
DTA created by credit to opening balance of Revenue Reserves
or to Profit and Loss account for the current year should be included
under item 'others' of "Other Assets."
Intangible assets and losses in the current period and those
brought forward from previous periods should be deducted from Tier I
capital.
DTA computed as under should be deducted from Tier I capital :
(i) DTA associated with accumulated losses; and
(ii) The DTA (excluding DTA associated with accumulated
losses) net of DTL. Where the DTL is in excess of the DTA (excluding
DTA associated with accumulated losses), the excess shall neither be
adjusted against item (i) nor added to Tier I capital."
All NBFCs (excluding RNBCs) were advised to refer to the Directions issued by the Reserve Bank of India in terms of Notification No. FMD.1/ED(VKS)-2009 dated August 28, 2009, covering the framework for trading of Interest Rate Futures (IRFs) in recognized exchanges in India.
It has been decided that NBFCs may participate in the
designated interest rate futures exchanges recognized by SEBI, as
clients, subject to RBI / SEBI guidelines in the matter, for the
purpose of hedging their underlying exposures.
NBFCs participating in IRF exchanges may submit the data in
this regard half yearly, in the format enclosed, to the Regional office
of the Department of Non-Banking Supervision in whose jurisdiction
their company is registered, within a period of one month from the
close of the half year.
NBFCs having FDI whether under automatic route or under
approval route have to comply with the stipulated minimum
capitalisation norms and other relevant terms and conditions, as
amended from time to time under which FDI is permitted.
As such these NBFCs are required to submit a certificate from
their Statutory Auditors on half yearly basis (half year ending
September and March) certifying compliance with the existing terms and
conditions of FDI. Such certificate may be submitted not later than one
month from the close of the half year to which the certificate
pertains, to the Regional Office in whose jurisdiction the head office
of the company is registered.
19. Finance for Housing
Projects - Incorporating clause in the terms and conditions to disclose
in pamphlets / brochures / advertisements, information regarding
mortgage of property to the NBFC
In a case which came up before the Hon'ble High Court of
Judicature at Bombay, the Hon'ble Court observed that the bank granting
finance in housing, should insist on projects, disclosure of the charge
or any other liability on the plot in question or development project
being duly made in the Brochure or pamphlet etc. which may be published
by developer / owner inviting public at large to purchase flats and
properties. The Court also added that this obviously would be part of
the terms and conditions on which the loan may be sanctioned by the
bank.
Keeping in view the above, it is felt desirable that while
granting finance to housing / development projects, NBFCs also should
stipulate as a part of the terms and conditions that :
(i) the builder / developer / owner / company would disclose
in the Pamphlets / Brochures / advertisements etc., the name(s) of the
entity to which the property is mortgaged.
(ii) the builder / developer / owner / company should indicate
in the pamphlets / brochures, that they would provide No Objection
Certificate (NOC) / permission of the mortgagee entity for sale of
flats / property, if required.
NBFCs were advised to ensure compliance with the above
stipulations and funds should not be released unless the builder /
developer / owner / company fulfils the above requirements.
It was brought to the notice of RBI that a NBFC has
discriminated against physically / visually challenged persons in the
matter of offering loans.
NBFCs were therefore advised that there shall be no
discrimination in extending products and facilities including loan
facilities to the physically / visually challenged applicants on
grounds of disability. NBFCs were also instructed to advise their
branches to render all possible assistance to such persons for availing
of the various business facilities.
Reserve Bank had issued guidelines to banks on trading in
currency futures in recognised stock/new exchanges on August 6, 2008.
It was decided that all NBFCs excluding RNBCs may participate in the
designated currency futures exchanges recognized by SEBI as clients, subject
to RBI (Foreign Exchange Department) guidelines in the matter, only
for the purpose of hedging their underlying forex exposures. NBFCs were
advised tomake appropriate regarding transactions undertaken in the
Balance sheet.
In terms of DNBS.CC.PD.No.191/03.10.01/2010-11 dated July 27, 2010
NBFCs were advised that there shall be no discrimination in extending
products and facilities including loan facilities to the physically /
visually challenged applicants on grounds of disability and that they
may also advise their branches to render all possible assistance to
such persons for availing of the various business facilities.
In continuation to the above, NBFCs are advised that they may
include a suitable module containing the rights of persons with
disabilities guaranteed to them by the law and international
conventions, in all the training programmes conducted for their
employees at all levels. Further, NBFCs may ensure redressal of
grievances of persons with disabilities under the Grievance Redressal
Mechanism already set up by them.
23. Submission of data to Credit Information Companies - Format of data to be submitted by Credit Institutions
In terms of Section 2(f)(ii) of the Credit Information
Companies (Regulation) Act, 2005, a non-banking financial company as
defined under clause (f) of Section 45-I of the Reserve Bank of India
Act, 1934 has also been included as "credit institution". Further, the
Credit Information Companies (Regulation) Act provides that every
credit institution in existence shall become a member of at least one
credit information company. Thus all NBFCs being credit institutions
are required to become a member of at least one credit information
company as per the statute.
In this regard, in terms of sub-sections (1) and (2) of Section
17 of the Credit Information Companies (Regulation) Act, 2005, a
credit information company may require its members to furnish credit
information as it may deem necessary in accordance with the provisions
of the Act and every such credit institution has to provide the
required information to that credit information company. Further, in
terms of Regulation 10(a)(ii) of the Credit Information Companies
Regulations, 2006, every credit institution shall :
(a) keep the credit information maintained by it, updated
regularly on a monthly basis or at such shorter intervals as may be
mutually agreed upon between the credit institution and the credit
information company; and
(b) take all such steps which may be necessary to ensure that
the credit information furnished by it, is update, accurate and
complete.
It is therefore, advised that NBFCs which have become member /
members of any new credit information company / companies may provide
them the current data in the existing format. Such NBFCs may also
provide historical data in order to enable the new credit information
companies to validate their software and develop a robust database.
Care should be taken to ensure that no wrong data / history regarding
borrowers is given to Credit Information Companies.
As part of the ‘Green Initiative’ of the Government, the
Government of India has suggested that steps be taken by entities in
financial sector, including NBFCs to help better utilisation of their
resources and also better delivery of services.
NBFCs were therefore, requested to take proactive steps in
this regard by increasing the use of electronic payment systems,
elimination of post-dated cheques and gradual phase-out of cheques in
their day to day business transactions which would result in more
cost-effective transactions and faster and accurate settlements.
In view of reports of instances of frauds involving fake Bank
Guarantee with forged signature etc in certain bank branches, NBFCs
were advised to take notice of the names of the beneficiaries
/representative of beneficiaries and applicants of BGs in order to
exercise due caution while handling cases involving the
firms/individuals cited in the circular.
NBFCs shall only participate in CDS market as users. As users,
they would be permitted to buy credit protection only to hedge their
credit risk on corporate bonds they hold. They are not permitted to
sell protection and hence not permitted to enter into short positions
in the CDS contracts. However, they are permitted to exit their bought
CDS positions by unwinding them with the original counterparty or by
assigning them in favour of buyer of the underlying bond.
Apart from complying with all the provisions above, NBFCs were
advised that, as users, they shall also be required to ensure that the
guidelines enclosed including operational requirements for CDS are
fulfilled by them.
27.1 Revisions to the Guidelines on Securitisation Transactions
Detailed Guidelines on Securitisation of Standard Assets were issued to NBFCs vide Circular DBOD.NO.BP.BC.60/ 21.04.048/2005-06 dated February 01, 2006.
In order to prevent unhealthy practices surrounding
securitization viz; origination of loans for the sole purpose of
securitization and in order to align the interest of the originator with
that of the investors and with a view to redistribute credit risk to a
wide spectrum of investors, it was felt necessary that originators
should retain a portion of each securitization originated and ensure
more effective screening of loans. In addition,a minimum period of
retention of loans prior to securitization was also considered
desirable, to give comfort to the investors regarding the due diligence
exercised by the originator. Keeping in view the above objectives, it
was decided to extend the guidelines issued in this regard to banks and
NBFCs also. (Annex -3). The guidelines also include, inter alia, bilateral sale of assets, accounting of profits and disclosures.
28.Standardisation and Enhancement of Security Features in Cheque Forms - Migrating to CTS 2010 Standards
All NBFCs were advised about the "CTS-2010 standard“ which is a
set of benchmarks towards achieving standardisation of cheques issued
by banks across the country and include provision of mandatory minimum
security features on cheque forms like quality of paper, watermark,
bank's logo in invisible ink, void pantograph, etc., and
standardisation of field placements on cheques. NBFCs were advised that
"CTS-2010 standard“ were to be implemented by December 31, 2012 and
those NBFCs who accept post dated cheques from their customers for
future EMI payments were required to ensure the replacement of
Non–CTS-2010 standard compliant cheques with CTS-2010 standard
compliant cheques before December 31, 2012. However,taking
into consideration the representations from NBFCs, it was decided to
extend the time up to March 31, 2013 to ensure withdrawal of Non-CTS
2010 Standard compliant cheques and replace them with CTS-2010 Standard
compliant cheques. However,NBFCs were advised to note that the
residual Non-CTS-2010 Standard compliant cheques that get presented in
the clearing system beyond the extended period, will continue to be
accepted for the clearing but will be cleared at less frequent
intervals.
Government has envisaged providing “Broadband on Demand” by
2015 in the recently unveiled National Telecom Policy (NTP) – 2012
emphasizing the role of Internet as catalyst for socio-economic
development of a country which serves as an effective medium of various
citizen centric services in today’s information economy. Since the
current version of Internet Protocol (IPv4) has almost run out of
addresses, NTP-2012 recognizes the futuristic role of next generation
Internet Protocol IPv6 and aims to achieve substantial transition to
IPv6 in the country.
Department of Telecommunication under the Ministry of
Communication and Information Technology, Government of India has
undertaken the initiative of migration from IPv4 to IPv6.
Since migration to IPv6 is an eventuality that has to be
accepted and manage proactively, NBFCs/RNBCs were advised to initiate
necessary action by constituting a special team to complete the
migration by December 2012.
30. Checklist for NBFCs, Non Banking Financial Company-Micro Finance
Institutions (NBFC-MFIs), Non Banking Financial Company-Factoring
Institutions (NBFC-Factors) and Core Investment Companies (CICs)
Five checklists with respect to Application for seeking
Certificate of Registration from the Reserve Bank have been uploaded in
the RBI website, a) documents required for registration as NBFCs b)
documents required for registration of NBFC-MFI – New Companies and c)
documents required for registration of NBFC-MFI (Existing NBFCs) d)
documents required for registration of NBFC – Factors and e) documents
required for registration as CIC-ND-SI. (Annex 4)
Checklists mentioned are indicative and not exhaustive. Bank
can, if necessary, call for any further documents to satisfy themselves
on the eligibility for obtaining registration as NBFC. In the event of
the Bank calling for further documents in addition to those mentioned
in the checklist, the applicant company must respond within a
stipulated time of one month failing which the application/request for
conversion along with all the documents will be returned to the company
for submission afresh with the required information/documents
NBFCs raise money by issuing capital/debt securities including
debentures by way of public issue or private placement. In the case of
public issue of such securities, institutions and retail investors can
participate. Private placement, on the other hand, may involve
institutional investors. It has however been observed that NBFCs have
lately been raising resources from the retail public on a large scale,
through private placement, especially by issue of debentures.
2. As certain adverse features have come to the notice of the
Reserve Bank in private placements by certain NBFCs, it has been decided
to put in place a minimum set of guidelines (given in the annex)
for compliance by all NBFCs. The Guidelines require NBFCs to space out
such issuances and also aim to bring NBFCs at par with other financial
entities as far as private placement is concerned by restricting the
maximum number of subscribers to forty nine (currently the ceiling of
investors stipulated by the Companies Act 1956 for private placement is
not applicable for NBFCs). It may be noted that all other extant
guidelines on private placement remain unchanged. The provisions of
these guidelines will however override other instructions in this
regard, wherever contradictory.
3. In addition, certain clarifications are also made with
regard to security cover for any debenture issue and the treatment of
unsecured debentures as public deposits.
4. These instructions come into effect immediately.
Guidelines for Credit Default Swaps - NBFCs as users
Definitions
The following definitions are used in these guidelines:
(i) Credit event payment – the
amount which is payable by the credit protection seller to the credit
protection buyer under the terms of the credit derivative contract
following the occurrence of a credit event. The payment can be only in
the form of physical settlement (payment of par in exchange for physical delivery of a deliverable obligation).
(ii) Underlying asset / obligation – The asset1 which a protection buyer is seeking to hedge.
(iii) Deliverable asset / obligation – any obligation of the reference entity which can be delivered, under the terms of the contract, if a credit event occurs.
(Assets under (iii) above, will rank at least pari-passu or junior to the underlying obligation).
(iv) Reference obligation - the obligation
used to calculate the amount payable when a credit event occurs under
the terms of a credit derivative contract. [A reference obligation is
relevant for obligations that are to be cash settled (on a
par-less-recovery basis).]
2. Operational requirements for CDS
a) A CDS contract should represent a direct claim on the
protection seller and should be explicitly referenced to specific
exposure, so that the extent of the cover is clearly defined and
incontrovertible.
b) Other than non-payment by a protection buyer of premium in
respect of the credit protection contract, it should be irrevocable.
c) There should be no clause in the contract that
would allow the protection seller unilaterally to cancel the credit
cover or that would increase the effective cost of cover as a result of
deteriorating credit quality in the hedged exposure.
d) The CDS contract should be unconditional; there should be
no clause in the protection contract outside the direct control of the
NBFC that could prevent the protection seller from being obliged to pay
out in a timely manner in the event that the original counterparty
fails to make the payment(s) due.
e) The credit events specified by the contracting parties should at a minimum cover:
(i) failure to pay the amounts due under terms of the
underlying obligation that are in effect at the time of such failure
(with a grace period that is closely in line with the grace period in
the underlying obligation);
(ii) bankruptcy, insolvency or inability of the obligor to pay
its debts, or its failure or admission in writing of its inability
generally to pay its debts as they become due, and analogous events;
and
(iii) restructuring of the underlying obligation (as contemplated in the guidelines on CDS issued vide Circular No. IDMD.PCD.No.5053/14.03.04/2010-11 dated May 23, 2011) involving forgiveness or postponement of principal, interest or fees that results in a credit loss event;
(iv) when the restructuring of the underlying obligation is
not covered by the CDS, but the other requirements in paragraph 2 are
met, partial recognition of the CDS will be allowed. If the amount of
the CDS is less than or equal to the amount of the underlying
obligation, 60% of the amount of the hedge can be recognised as
covered. If the amount of the CDS is larger than that of the underlying
obligation, then the amount of eligible hedge is capped at 60% of the
amount of the underlying obligation.
f) If the CDS specifies deliverable obligations that are
different from the underlying obligation, the resultant asset mismatch
will be governed under paragraph (j).
g) The CDS shall not terminate prior to expiration of any
grace period required for a default on the underlying obligation to
occur as a result of a failure to pay.
h) If the protection buyer’s right/ability to transfer the
underlying obligation to the protection seller is required for
settlement, the terms of the underlying obligation should provide that
any required consent to such transfer may not be unreasonably withheld.
i) The identity of the parties responsible for determining
whether a credit event has occurred should be clearly defined. This
determination should not be the sole responsibility of the protection
seller. The protection buyer should have the right/ability to inform
the protection seller of the occurrence of a credit event.
j) A mismatch between the underlying obligation and the
reference obligation or deliverable obligation is permissible if (1)
the reference obligation or deliverable obligation ranks pari passu with
or is junior to the underlying obligation, and (2) the underlying
obligation and reference obligation or deliverable obligation share the
same obligor (i.e. the same legal entity) and legally enforceable
cross-default or cross-acceleration clauses are in place.
(k) A mismatch between the underlying obligation and the
obligation used for purposes of determining whether a credit event has
occurred is permissible if (1) the latter obligation ranks pari passu with
or is junior to the underlying obligation, and (2) the underlying
obligation and reference obligation share the same obligor (i.e. the
same legal entity) and legally enforceable cross-default or cross
acceleration clauses are in place.
3. Treatment of exposures below materiality thresholds
Materiality thresholds on payments below which no payment is
made in the event of loss as per the CDS contract, are equivalent to
retained first loss positions and should be assigned risk weight of
667% (1/0.15*100 as minimum CRAR requirement for NBFCs is 15%) for
capital adequacy purpose by the protection buyer.
4. Prudential treatment post-credit event
In case the credit event payment is not received within the
period as stipulated in the CDS contract, the NBFC shall ignore the
credit protection of the CDS and reckon the credit exposure on the
underlying asset and maintain appropriate level of capital and
provisions as warranted for the exposure. On receipt of the credit
event payment, (a) the underlying asset shall be removed from the books
if it has been delivered to the protection seller; or (b) the book
value of the underlying asset shall be reduced to the extent of credit
event payment received if the credit event payment does not fully cover
the book value of the underlying asset and appropriate provisions
shall be maintained for the reduced value.
5. Capital Adequacy
In terms of NBFC Prudential Norms Directions, 2007, risk
weights for credit risk for corporate bonds held by NBFCs is 100%. A
CDS contract creates a counterparty exposure on the protection seller on
account of the credit event payment. In case of hedging of the cash
position by CDS, the exposure will be reckoned on the protection seller
subject to the conditions mentioned in para 6 below. NBFCs shall
calculate the counterparty credit risk charge for all bought CDS
positions as the sum of the current mark-to-market value, (if positive
and zero, if MTM is negative) and the potential future exposure.
6. Treatment of exposure to the protection seller
6.1 Exposure to the underlying asset in respect of the hedged
exposure shall be deemed to have been substituted by exposure to the
protection seller, if the following conditions are satisfied:
a. Operational requirements mentioned in para 2 are satisfied
b. There is no maturity mis-match between the underlying asset
and the deliverable obligation. If this condition is not satisfied,
then the amount of credit protection to be recognised should be
computed as indicated in paragraph 6.2 below.
In all other cases the exposure will be deemed to be on the underlying asset.
6.2 Risk weights as applicable to the underlying assets shall
be applied for the unprotected portion of the exposure. The amount of
credit protection shall be adjusted if there are any mismatches
between the underlying asset/ obligation and the deliverable asset /
obligation with regard to asset or maturity. These are dealt with in detail in the following paragraphs.
6.3 Mismatches
The amount of credit protection shall be adjusted if there are
any mismatches between the underlying asset/ obligation and the
deliverable asset / obligation with regard to asset or maturity.
(i) Asset mismatches
Asset mismatch will arise if the underlying asset is different
from the deliverable obligation. Protection will be reckoned as
available to the NBFC only if the mismatched assets meet the
requirements specified in paragraph 2 (j) above.
(ii) Maturity mismatches
The NBFC would be eligible to reckon the amount of protection
if the maturity of the credit derivative contract were to be equal to
the maturity of the underlying asset. If, however, the maturity of the
CDS contract is less than the maturity of the underlying asset, then it
would be construed as a maturity mismatch. In case of maturity
mismatch the amount of protection will be determined in the following
manner:
a. If the residual maturity of the credit derivative product is less than three months no protection will be recognized.
b. If the residual maturity of the credit derivative contract is three months or
more protection proportional to the period for which it is available
will be recognised. When there is a maturity mismatch the following
adjustment will be applied.
Pa = P x (t- .25) ÷ (T- .25)
Where:
Pa = value of the credit protection adjusted for maturity mismatch
P = credit protection
t = min (T, residual maturity of the credit protection arrangement) expressed in years
T = min (5, residual maturity of the underlying exposure) expressed in years
Pa = value of the credit protection adjusted for maturity mismatch
P = credit protection
t = min (T, residual maturity of the credit protection arrangement) expressed in years
T = min (5, residual maturity of the underlying exposure) expressed in years
Example: Suppose the
underlying asset is a corporate bond of Face Value of Rs. 100 where the
residual maturity is of 5 years and the residual maturity of the CDS is
4 years. The amount of credit protection is computed as under:
100 * {(4-.25) ÷ (5-.25)} = 100*(3.75÷ 4.75) = 78.95
c. Once the residual maturity of the CDS contract reaches three months, protection ceases to be recognised.
6.4 NBFCs as users need to adhere to all the criteria required
for transferring the exposures fully to the protection seller in terms
of paragraph 7.1 above on an on-going basis so as to qualify for
exposure relief on the underlying asset. In case any of these criteria
are not met subsequently, the NBFC will have to reckon the exposure on
the underlying asset. Therefore, NBFCs should restrict the total
exposure to an obligor including that covered by way of CDS within an
internal exposure ceiling considered appropriate by the Board of the
NBFC in such a way that it does not breach the single / group borrower
exposure limit prescribed by RBI. In case of the event of any breach in
the single / group borrower exposure limit, the entire exposure in
excess of the limit will be risk weighted at 667%. In order to ensure
that consequent upon such a treatment, the NBFC does not breach the
minimum capital requirement prescribed by RBI, it should keep
sufficient cushion in capital in case it assumes exposures in excess of
normal exposure limit.
6.5 No netting of positive and negative marked-to-market
values of the contracts with the same counterparty will be allowed for
the purpose of complying with the exposure norms.
7. General Provisions Requirements
For the CDS positions of NBFCs, they should hold general
provisions for gross positive marked-to-market values of the CDS
contracts.
8. Reporting Requirement:
On a quarterly basis, NBFCs should report “total exposure” in
all cases where they have assumed exposures against borrowers in excess
of the normal single / group exposure limits due to the credit
protections obtained by them through CDS, guarantees or any other
permitted instruments of credit risk transfer, to the Regional Office
of Department of Non-Banking Supervision where they are registered.
9. NBFCs shall also disclose in their notes to accounts of balance sheet the details given in annex- 2.
Format of disclosure to be made in the Annual Financial Statements
(Rs. crore)
1. No. of transactions during the year
2. Amount of protection bought during the year
3. No. of transactions where credit event payment was received during the year
a) pertaining to current year’s transactions
b) pertaining to previous year(s)’ transactions
4. Outstanding transactions as on March 31:
a) No. of Transactions
b) Amount of protection
5. Net income/ profit (expenditure/ loss) in respect of CDS transactions during year-to-date:
a) premium paid
b) Credit event payments received (net of value of deliverable obligation).
A. Guidelines on Private Placement by NBFCs:
1. Definitions:
i. "Preferential Allotment" or "Private placement" means an
issue of capital made by an NBFC in pursuance of a resolution passed
under sub-section (1A) of section 81 of the Companies Act, 1956.
ii. "Public issue" means an invitation by an NBFC to public to subscribe to the securities offered through a prospectus.
iii. A Non-Banking Financial Company (NBFC) means an NBFC as
defined in Section 45 I (f) read with Section 45 I (c) of the RBI Act,
1934.
2. Regulations
i. The offer document for private placement should be issued
within a maximum period of 6 months from the date of the Board
Resolution authorizing the issue. The offer document should include the
names and designations of the officials who are authorised to issue
the offer document. The Board Resolution and the offer document must
contain information on purpose for which the resources are being
raised.
ii. The offer document may be printed or typed "For Private
Circulation Only". General information including the address of the
registered office of the NBFC, date of opening / closing of the issue
etc. shall be clearly mentioned in the offer document.
iii. An NBFC shall only issue debentures for deployment of
funds on its own balance sheet and not to facilitate resource requests
of group entities/ parent company / associates.
iv. Private placement by all NBFCs shall be restricted to not more than 49 investors, identified upfront by the NBFC.
v. The minimum subscription amount for a single investor shall be Rs. 25 lakh and in multiples of Rs.10 lakh thereafter.
vi. There should be a minimum time gap of at least six months between two private placements.
vii. An NBFC shall not extend loans against the security of its
own debentures (issued either by way of private placement or public
issue).
viii. AII other extant instructions with regard to private placement remain unchanged.
ix. The provisions of the Guidelines shall override other instructions wherever contradictory.
B. Security cover for debentures (by private placement or public issue):
NBFCs shall ensure that at all points of time the debentures
issued, including short term NCDs, are fully secured. Therefore in
case, at the stage of issue, the security cover is insufficient /not
created, the issue proceeds shall be placed under escrow until creation
of security, which in any case should be within one month from the
date of issue.
C. Amendment to Directions:
(i) Para 2(xii)(f) and (i) of the Non-Banking Financial
Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998
has been amended to clarify that only those debentures that are either
compulsorily convertible into equity or fully secured would be
exempted from the definition of public deposits. Hybrid / subordinated
debt with a maturity not less than sixty months would continue to be
exempted from the definition of public deposits provided there is no
option for recall by the issuer within the period.
Ozg NBFC Consultant
Ozg Center | Delhi | Mumbai | Chennai | Bangalore | Kolkata
Back Office Phone # 09811415831-37-61-72-84-92-94
