Thursday, September 25, 2008

Now even non-deposit accepting NBFCs of asset size of Rs. 50 crores subject to reporting to RBI

Reserve Bank of India issued on 24th September 2008 (see here) certain reporting requirements for certain non-deposit accepting non-banking financial companies (NBFCs). What is important though is that these will be applicable to such NBFCs of asset size Rs. 50 crores but less than Rs. 100 crores. Though such entities are not given the status of Systemically Important NBFCs, effectively, it is seen that the benchmark or asset size is lowered to Rs. 50 crores though this new category would be exposed to lesser requirements, at least for now.

Let us consider some background.

Normally, Reserve Bank of India governs only deposit-accepting non-banking financial companies (NBFCs). Non-depositing NBFCs have generally been left alone for most purposes after initial registration. However, it was realized over a period of time that such non-deposit accepting entities had become relatively large in terms of asset size and their acts, omissions and defaults could have wider repercussions on the financial markets generally. Thus the concept of Systemically Important non-deposit accepting NBFCs was introduced (also called ND-SI). They were mainly required to give some reports though some substantive requirements were also placed. What is important is that initially the minimum size of an NBFC to reach the Systemically Important status was Rs. 500 crores. Over a period of time this limit was gradually lowered and today it stands at Rs. 100 crores.

The latest circular cited above now creates yet another category no term has apparently yet been given to it where the asset size is between Rs. 50 crores and Rs. 100 crores. Thus, this requirement is to catch them early. Once the NBFC reaches the asset size of Rs. 100 crores, it achieves the status of Systemically Important and would be subject to more comprehensive requirements.

This new reporting requirement is quarterly and is with immediate effect, i.e., the first report is to be given for the quarter ended 30th September 2008 though for this first period, the report may be given by the first week of December 2008 and thereafter within one month of the end of each quarter. These reports are to be filed electronically but the mechanics of this would be circulated by the Reserve Bank of India later on.

The sub-prime crisis is too fresh in the mind to be even discussed here and the supervision of the Reserve Bank of India of non-deposit taking NBFCs can be only viewed in this context as good conservative measures. The problem though is that complex regulatory requirements are created at times of crisis but continue indefinitely even after the crisis passes by.

8 comments:

Sridip Nambiar said...

You have mentioned that non-deposit accepting NBFC's have to register intially. Can you provide me the source of this procedure, as i cannot find it. RBI Act has a chapter devoted to NBFC's, which is applicable only to deposit-accepting NBFC's.

Jayant Thakur, CA said...

Thanks, Sridip. Actually your query concerns an issues that also bothers  many companies generally as to how and why registration is required even if a company does not raise deposits from public.

The Chapter that you cited, Chapter III-B of RBI Act, that covers registration of NBFCs requires (specifically through section 45IA) all NBFCs carrying on specified businesses to register. The focus is on business and not source of funds used for such business. Hence hundreds of NBFCs not raising public deposits still have had to register and have registered.

RBI gives 2 types of Certificate of Registration - one for those wanting to raise deposits and one for those who do not. Also, RBI has issued 2 sets of Prudential Norms in 2007 - one for those who raise deposits and the other (diluted version) for those who do not. And so on. There is lesser regulation of non-deposit taking NBFCs but registration though is a must.

For more details I request you to read Sections 45I and 45IA and feel free to get back if there are still any issues.

Jayant Thakur, CA

Sridip Nambiar said...

Thank you, Jayant for the response. But, on perusal of the sections, some doubts arise:

(i)Section 45I (f) which defines an NBFC mentions only those receiving deposits. How can this be applicable to a non-deposit accepting NBFC?

(ii) Both the sections that you have cited is part of cjapter IIIB, which is applicable only to deposit-accepting NBFC's.

Please note that i am aware of such NBFC's procuring registration. This query is just to clarify a theoretical anomaly. Thank you once again.

Jayant Thakur, CA said...

Thanks, Sridip for your points. Sorry for the delayed reply.

You have referred to section 45I(f)(ii) that refers to entities that accept deposits and which therefore would be NBFCs. However, this is not the only category of NBFCs. See for example, clause (i) in that same sub-section. It refers to any financial institution that is a company and this entity too would be an NBFC. If you read definition of financial institution, I am sure you will agree with me that even entities that do not accept deposits but that carry on specified finance activities would be NBFCs. The definition is quite convoluted.

Your second point is "Both the sections that you have cited is part of cjapter IIIB, which is applicable only to deposit-accepting NBFC's.". How do you say that Chapter IIIB is applicable to deposit accepting NBFCs only?

kamal said...

Dear Jayant,

I have gone through with your article and it is very interesting and good article.

I have some doubts on the following issues, could you please help me out?

1. Company A (Consulting company) has invested in the shares of company B, and its finacial assets are more than 50% of its total assets. Dividend from this shares is more than 50% of its total income.
2. Whether Company A is required to register with RBI as NBFC?
3. Whether this company needs to have minimum NOF of 200lakhs?
4. This is not accepting any deposits and its a pvt ltd company.

kamal said...

Dear Jayant,

I have gone through with your article and it is very interesting and good article.

I have some doubts on the following issues, could you please help me out?

1. Company A (Consulting company) has invested in the shares of company B, and its finacial assets are more than 50% of its total assets. Dividend from this shares is more than 50% of its total income.
2. Whether Company A is required to register with RBI as NBFC?
3. Whether this company needs to have minimum NOF of 200lakhs?
4. This is not accepting any deposits and its a pvt ltd company.

Anonymous said...

Any special requirement pertaining to reporting and investments pattern for a systematically important non deposit taking NBFC?

Anonymous said...

I am working in NBFC Company as a Assistant. i want to diclose Ressoluton passed For Non Acceptance of Deposit in Board Meeting.
So please Assist me How to dislose in Board's Minutes.