NBFC Compliances and Returns

Introduction to NBFC Compliances and Returns

It's no doubt that NBFCs have changed the landscape of the Financial Services Sector in India. NBFCs have a projected growth of a tremendous 19-21% for the 2018-19 Financial Year. However, ever since the infamous incident with Sahara India Financial Corporation in 2015, the RBI has made stricter regulations for NBFCs. These institutes now, have to conform to NBFC compliances and returns. The RBI has been issuing various notifications and modifications for the functioning of NBFCs. Few of the most recent of which are Obligations under PML rules, Withdrawal of exemptions from government-owned NBFCs. The RBI has also mandated the application of Section 269SS and 269T on NBFCs.

All about NBFC Compliances and Returns

The  RBI released a notification on the 1st of September, 2016 declaring the Master Direction – Non-Banking Financial Company –Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016. These master directions lay down the foundation for RBI compliant and safe NBFC operational practices. NBFC Compliances and Returns are comprehensive and need to be read carefully so as to avoid closure by RBI.

Where are the Master Directions Applicable

• NBFC-ND(Non-Deposit) with an asset size below Rs. 500 Crore
• NBFC-Factor, NBFC-MFI (Micro Finance Institute), NBFC-IFC (Infrastructure Finance Company). Put together, these constitute the "Applicable NBFCs"
• Applicable NBFCs who have not accessed any public funds and do not have a customer interface will not have to follow any of Chapter IV (Prudential Regulations), para 68 (KYC directions) or the Chapter V (FPC guidelines).
• Applicable NBFCs who have not accessed public funds but have a customer interface are exempt from chapter IV of the master directions (Prudential regulations).

Prudential Regulations Features for NBFC compliances and returns

• Leverage Ratio - Cannot be more than 7 at any point of time for applicable NBFCs (Except NBFC-MFI and NBFC-IFCs)
• Accounting Standards- ICAI issued Accounting standards and Guidance notes should be followed by NBFCs so long as they aren't in violation of the Master Guidelines.
• Accounting of Investments- The Board of Directors of all applicable NBFCs have to frame and implement an investment policy
• Policy on Demand/Call Loans-  A policy for granting/ intending to grant demand/call loans has to be framed and implemented by the Board of Directors
• Asset Classification- Assets are classified as follows-
  • Standard Assets
  • Sub-standard Assets
  • Doubtful Assets
  • Loss Assets
• Standard Asset Provisioning-  Standard assets should be 0.25% of the outstanding and provisions of ensuring this has to be taken by applicable NBFCs
• Multiple NBFCs - NBFCs in a group will be aggregated to check for the limit of Rs. 500 crore assets size.
• Disclosure in the Balance Sheet- All applicable NBFCs are required to disclose the provisions for bad and doubtful debts and provisions for depreciation in investments.
• Schedule to the balance sheet -  All applicable NBFCs have to append the particulars in the schedule set out in the Master Directions to their balance sheet.
• Loans against NBFCs own shares prohibited- All applicable NBFCs are prohibited to lend against their own shares.
• Loan against Security of Shares -  Applicable NBFC having asset size equal to or more than Rs 100 crores lending against the collateral of listed shares have to maintain a Loan to Value (LTV) ratio of 50 %.
• A concentration of Credit/Investment for applicable NBFC - This provision is applicable for NBFCs held by NOFHC(Non-Operative Financial Holding Company)
• Change of Address,  Auditors, Directors - All applicable NBFCs should communicate a change in address, auditors, and Directors within one month of its occurrence

Fair Practices Codes for Applicable NBFCs

Applicable NBFCs with customer interface should adhere to the Fair Practices code. Among other things, the fair practices code has provisions for the following.

• Loan Appraisal and Terms and Conditions
• Disbursement of Loans as well as Changes in Terms and Conditions.
• General Responsibilities of the Board of Directors
• Grievance Redressal Officer
• Language and Mode of Communicating the Fair Practices Code
• Regulation of excessive interest charged by applicable
• Complaints about NBFCs charging excessive interest
• Repossession of Vehicles financed by applicable NBFCs
• Lending against the collateral of gold jewelry

Governance Issues

• Acquisition/ Transfer of Control: Prior Written permission of the Reserve Bank is required. See Buying and Selling of NBFCs
• Opening a Branch/Subsidiary/ Joint Venture / Representative Office or Undertaking Investments out of India: Applicable NBFC has to take prior permission.
• Expansion of activities through automatic route: Applicable NBFCs with FDI( Foreign Direct Investments) are permitted to undertake activities specified under the automatic route. Diversification requires permission from FIPB
• Ratings - Disclosure of upgrading/downgrading of rating of any financial product issued by Applicable NBFCs with asset size equal to or greater than Rs. 100 crore
• Applicability of KYC (Know Your Customer)  Direction, 2016 - Every applicable NBFC should follow KYC directions.
• Non-Reckoning of Fixed Deposits with banks as Financial Assets-  Fixed deposits will not be treated as financial assets and receipts of interest income on FD will not be treated as income from Financial Assets.
• Investments through Alternative Investment Funds
• Accounting for taxes on income- Accounting Standard 22
• Applicable NBFCs can't be partners in a partnership firm
• Credit Information Companies to receive the submission of historical data as well as current data from applicable NBFCs.
• Asset Liability Management - Applicable to all NBFCs with asset size more than or equal to 100 Crores
• Criteria for deciding NBFC ND-SI(Systematically Important) status - On reaching asset size of 500 Crore Rupees
• Public Notice for Closure of Branch/Office - NBFC has to issue 3 months prior notice before closure.

NBFC Returns

1. NBS-8 for NBFC-ND with asset size between Rs.100 Crores and Rs.500 Crores.
2. NBS-9  for NBFC-ND with asset size below Rs 100 Crore
3. File returns within 60 days of the conclusion of Financial Year

• Income from Financial and Financial Assets  should be more than 50%
• NBFCs should upload Auditor Certificate to http://cosmos.rbi.org

Thus, in conclusion, NBFCs have to be very careful with RBI norms and their comprehensive compliance requirements. It can be a daunting task to keep track of all new rules, regulations and compliance updates. Follow our blog to stay up to date with the latest on NBFC Compliances and returns.

If you're just beginning with your NBFC Registration process, you should consider taking help of our team of experts in LegalRaasta, where our aim is to simplify compliances. We also specialize in various taxation filings, such as GST registration and Income Tax Returns. Talk to us about your requirements at +91-8750008585 or drop us an e-mail at [email protected]