The Reserve Bank of India (RBI) on Monday introduced a slew of changes in regulations for non-banking financial companies (NBFCs), tightening rules in a phased manner over the next four years “to create a level-playing field that does not unduly favour or disfavour any institution.” NBFCs have been asked to increase their net-owned funds, the core capital ratio of all NBFCs has been harmonized, the time frame for classification of non-performing assets (NPAs) has been brought on par with banks and provisions for standard assets has also been increased. The central bank’s regulations on NBFCs have been long awaited given that the first recommendation to bring regulatory changes in the sector was suggested by a committee headed by former deputy governor Usha Thorat in 2011. RBI said the final recommendations draw from the Thorat committee and suggestions made by the committee on comprehensive financial services for small businesses and low-income households headed by former ICICI Bank Ltd executive Nachiket Mor. NBFCs in operation before April 1999 have been asked to increase their minimum net owned funds (NOF) to Rs.1 crore by March 2016 and further to Rs.2 crore by March 2017 from Rs.25 lakh currently or risk cancellation of their permits. Significant changes include a decision to streamline the core capital adequacy ratio for all non-deposit taking NBFCs with an asset size of Rs.500 crore. Such NBFCs will now be asked to maintain a core capital ratio of 10%, compared with a range of 7.5% to 12% currently. NBFCs have been given time till March 2017 to comply with the norms. The criteria for directors NBFCs has also been on par with banks. The new NBFC framework is aimed at addressing risks and regulatory gaps and arbitrage both within the sector as well as other financial institutions and harmonize regulations “to facilitate a smoother compliance culture among NBFCs”, RBI said. Classification of loan NPAs for NBFCs has also been brought inline with banks. All NBFCs have to classify loans overdue for 90 days as NPAs. However, this new rule will be applied in a phased manner starting in March 2016 till March 2018. Provisions for standard assets has also been increased from 0.25% of the loans outstanding to 0.40% of loans in a phased manner starting from March 2016 and to be complied by March 2018. “It is stated that in limited areas where harmonization has resulted in strengthening the regulations, generally adequate time has been given to manage the transition. The regulator will then focus on the most important and systemic risks,” the central bank said in a statement. For deposit-taking NBFCs, RBI said unrated asset-financing NBFCs that accept deposits must get an investment grade rating by March 2016 or stop accepting deposits. Between now and March 2016, unrated asset finance companies which are sub-investment grade can only renew deposits on maturity and not accept fresh deposits till they get an investment-grade rating. All asset financing NBFCs will be allowed to accept deposits upto 1.5 times their net owned funds, down from four times their net owned funds earlier. NBFCs above this threshold have been asked not to renew deposits. The norms attracted mixed reactions from NBFCs. The norms are “pragmatic” and will not disrupt the business of NBFCs because there is enough time to comply with them, said V. Vaidyanathan, chairman at Capital First Ltd. “The norms on tier 1 (core) capital, NPA recognition and standard asset provisioning are all pragmatic and will cause non-disruption whatsoever to the function of the sector,” Vaidyanathan said. “There is enough time for transition,” However, Umesh Revankar managing director at Shriram Transport Finance Co. Ltd, said stricter NPA classification norms and limiting the amount of deposits to 1.5 times of net owned funds will make it difficult for some companies to comply. “We did not expect RBI to enforce the NPA classification norms. Since our customers are mostly from the unbanked segment, they may find it difficult to cope with the 90-day norm. Even limiting the deposits to 1.5 times of net owned funds was unexpected. At times, banks put some restrictions when they extend funds to smaller NBFCs and they depend on public deposits.” Revankar said. “These norms will be restrictive for smaller NBFCs.” Classification of non-deposit taking NBFCs has also been tweaked. Earlier, such NBFCs which had assets over Rs.100 crore were considered systemically important. This cut-off has now been increased to Rs.500 crore “in light of the overall increase of growth of the NBFC sector.” Henceforth, NBFCs which are part of a single corporate group or have a common set of promoters will not been viewed on a stand-alone basis but the total assets including deposits taking NBFCs will be aggregated to determine whether its total assets are below or above Rs.500 crore, RBI said. While RBI has tightened norms, the additional time given to NBFCs to comply with the tighter norms comes as a relief. In addition, tighter provisions related to liquidity management which had been suggested by previous RBI committees have been avoided. “We feel these norms are really good. Most things that the industry was apprehensive about have been avoided here. Norms are risk based and not too complicated. RBI has recognized the importance of NBFCs and hence is tailor-making regulations around it.
