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Middle Layer NBFCs: Navigating Scale-Based Regulations

As per Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 (hereinafter referred to as “SBR Master Direction” or “Master Direction on SBR”) dated 19 October 2023, the regulatory structure for Non-Banking Financial Companies (NBFCs) shall comprise of four layers based on their size, activity and perceived riskiness.

  • Base layer (NBFC-BL): which includes non-deposit-taking NBFCs with an asset size of less than INR 1,000 crore, NBFC P2P, NOFHCs, NBFCs not availing public funds and not having any customer interface etc.
  • Middle layer (NBFC-ML): which includes all deposit-taking NBFCs, non-deposit-taking NBFCs with asset size of INR 1,000 crore and more, HFCs, IDF NBFCs, etc.       
  • Upper layer (NBFC-UL): which includes NBFCs that are specifically identified by the RBI; and;
  • Top layer (NBFC-TL): which will include NBFCs which the RBI shifts from the upper layer to the top layer if such NBFCs have potential systemic risk.

NBFCs Middle Layer (NBFCs-ML):

The Middle Layer shall consist of:

  1. All deposit-taking NBFCs (NBFCs-D), irrespective of asset size,
  2. Non-deposit-taking NBFCs with asset size of ₹1,000 crore and above, and
  3. NBFCs undertaking the following activities :
    • Standalone Primary Dealer (SPD),
    • Infrastructure Debt Fund-Non-Banking Financial Company (IDF-NBFC),
    • Core Investment Company (CIC),
    • Housing Finance Company (HFC) and ;
    • Non-Banking Financial Company-Infrastructure Finance Company (NBFC-IFC)

NBFC-D, CIC, NBFC-IFC and HFC will be included in the Middle Layer or the Upper Layer (and not in the Base layer), as the case may be. SPD and IDF-NBFC will always remain in the Middle Layer.

The remaining NBFCs, viz., NBFC-Investment and Credit Companies (NBFC ICCs), NBFC-Micro Finance Institutions (NBFC-MFIs), NBFC-Factors and Mortgage Guarantee Companies (MGCs) could lie in any of the layers of the regulatory structure depending on the parameters of the scale based regulatory framework.

Criteria for deciding NBFC-Middle Layer status:

Once an NBFC reaches an asset size of ₹1,000 crore or above, it shall be subject to the regulatory requirements as per Section III of Master Direction on SBR, despite not having such assets as on the last balance sheet date. All such non-deposit-taking NBFCs shall comply with the regulations/directions issued to NBFCs-Middle Layer from time to time, as and when they attain an asset size of ₹1,000 crore, irrespective of the date on which such size is attained.

Regulatory instructions specified in Section III shall be applicable to NBFC-Middle Layer. In addition, regulatory instructions applicable to NBFC-Base Layer as specified in Section II shall also be applicable to NBFC-Middle Layer, unless stated otherwise.

In a dynamic environment, the asset size of NBFCs can fall below ₹1,000 crore in a given month, which may be due to temporary fluctuations and not due to actual downsizing. In such a case, the NBFC shall continue to meet the reporting requirements and shall comply with the extant directions as applicable to NBFC-Middle Layer, till the submission of its next audited balance sheet to the Reserve Bank and a specific dispensation from the Reserve Bank in this regard.

Exemptions:

The Directions under Chapter IV, Chapter V, paragraphs 4.1.1, 45, 66, and 67 of Master Direction on SBR shall not apply to NBFCs not availing public funds and not having any customer interface.

NBFCs availing public funds but not having any customer interface are exempt from the applicability of paragraphs 4.1.1, 45, 66, and 67 of the Master Direction on SBR.

NBFCs-Base Layer having a customer interface but not availing public funds are exempt from the applicability of Chapter IV and Chapter V of the Master Direction on SBR.

Key Definitions:

“Current investment” means an investment which is by its nature readily realizable and is intended to be held for not more than one year from the date on which such investment is made.

“Customer interface” means interaction between the NBFC and its customers while carrying on its business.

“Hybrid debt” means a capital instrument that possesses certain characteristics of equity as well as of debt.

“Long Term Investment” means an investment other than a current investment.

“Major shareholder” means a person holding 10% or more of the paid-up share capital or five crore rupees in paid-up shares, whichever is lower.

“Public Funds” includes funds raised either directly or indirectly through public deposits, inter-corporate deposits, bank finance, and all funds received from outside sources such as funds raised by the issue of Commercial Papers, debentures, etc. but excludes funds raised by the issue of instruments compulsorily convertible into equity shares within a period not exceeding five years from the date of issue.

“Substantial interest” means holding of a beneficial interest by an individual or his spouse or minor child, whether singly or taken together in the shares of a company, the amount paid up on which exceeds ten percent of the paid-up capital of the company; or the capital subscribed by all the partners of a partnership firm.

“Tier 1 capital” for NBFCs (except NBFCs-Base Layer ) is the sum of

  • Owned fund as reduced by investment in shares of other NBFCs and in shares, debentures, bonds, outstanding loans and advances including hire purchase and lease finance made to and deposits with subsidiaries and companies in the same group exceeding, in aggregate, ten percent of the owned fund; and
  • Perpetual debt instruments issued by a non-deposit taking NBFCs in each year to the extent it does not exceed 15 percent of the aggregate Tier 1 capital of such company as on March 31 of the previous accounting year.

“Tier 2 capital” for NBFCs (except NBFCs-Base Layer ) is the sum of

  • Preference shares other than those which are compulsorily convertible into equity;
  • Revaluation reserves at discounted rate of 55 percent;
  • General provisions (including that for Standard Assets) and loss reserves to the extent these are not attributable to actual diminution in value or identifiable potential loss in any specific asset and are available to meet unexpected losses, to the extent of one and one-fourth percent of risk-weighted assets;
  • Hybrid debt capital instruments;
  • Subordinated debt; and
  • Perpetual debt instruments issued by a non-deposit-taking NBFC which is in excess of what qualifies for Tier 1 capital; to the extent the aggregate does not exceed Tier 1 capital.

Regulation No.

Provision

Action to be taken

33.6 – 

Dividend Declaration

NBFCs, other than NBFCs-BL, declaring dividends shall report details of dividends declared during the financial year as per the format prescribed in Annex IX. The report shall be furnished within a fortnight after declaration of dividend to the Regional Office of the Department of Supervision of the Reserve Bank.

81 – Capital Requirement

81.1- NBFCs shall maintain a minimum capital ratio consisting of Tier 1 and Tier 2 capital which shall not be less than 15 percent of its aggregate risk-weighted assets on the balance sheet and of risk-adjusted value of off-balance sheet items.

81.2- Tier 1 capital in respect of NBFC (except NBFC-MFI and NBFC primarily engaged in lending against gold jewellery26), at any point of time, shall not be less than 10 percent.

82 – Capital raising option for capital adequacy purposes

Taking into consideration, the need for enhanced funds for increasing business and meeting regulatory requirements, NBFCs (except NBFCs-D) are permitted to augment their capital funds by issuing Perpetual Debt Instruments (PDI) in accordance with the guidelines contained in Annex XX of Master Direction on SBR. Such PDI shall be eligible for inclusion as Tier 1 capital to the extent of 15 percent of total Tier 1 capital as on March 31 of the previous accounting year.

Regulation No.

Provision

Action to be taken

83- Internal Capital Adequacy Assessment Process (ICAAP)

NBFCs are required to make a thorough internal assessment of the need for capital, commensurate with the risks in their business. This internal assessment shall be on similar lines as ICAAP prescribed for commercial banks under Pillar 2 (Master Circular – Basel IIICapital Regulations, dated May 12, 2023, as amended from time to time).

NBFCs are required to make an internal assessment process to assess the need for capital requirements.

87- Asset Classification

Under the SBR Master Directions, the NPA classification norm applicable to all NBFCs-BL (including formerly non-systemically important NBFCs) stands changed to the overdue period of more than 90 days. While the SBR Master Directions have come into effect from the date of their publication, the RBI has prescribed a glide path to NBFCs-BL in relation to this requirement

Middle Layer NBFCs are also required to make provisions even for their standard assets at 0.40% of the outstanding standard loans. This provisioning is not permitted to be counted for arriving at net NPAs in relation to such middle-layer NBFCs.

90- Disclosure in Financial Statement – Notes to Accounts

90.1- NBFCs shall put up to the Board of Directors, at regular intervals, as may be prescribed by the Board in this regard, The progress made in putting in place a progressive risk management system and risk management policy and strategy followed by the NBFC and Conformity with corporate governance standards viz., in the composition of various committees, their role and functions, periodicity of the meetings and compliance with coverage and review functions, etc.

In the Board Meeting in which Financials are approved, the Board shall also review the risk management system and risk management policy and strategy followed by the NBFC and Corporate Governance Standards.

Regulation No.

Provision

Action to be taken

94.1- Audit Committee

NBFCs shall constitute an Audit Committee, consisting of not less than three members of its Board of Directors.

NBFC shall constitute the Audit Committee and its composition, meetings, powers, etc. shall be in line with Section 177 of the Companies Act 2013.

94.1.2- Information System Audit

The Audit Committee must ensure that an Information System Audit of the internal systems and processes is conducted at least once in two years to assess operational risks faced by the NBFCs.

The Audit Committee of NBFC shall conduct an Information System Audit at least once in two years.

94.2- Nomination and Remuneration Committee

NBFCs shall form a Nomination and Remuneration Committee (NRC) which shall have the constitution, powers, functions and duties as laid down in section 178 of the Companies Act, 2013.

NBFC Shall constitute NRC and its composition, meetings, powers, etc. shall be in line with Section 178 of the Companies Act 2013.

95- Appointment of Chief Risk Officer

NBFCs with asset size of more than ₹5,000 crore in categories – NBFC-ICC, NBFC-IFC, NBFC-MFI, NBFC-Factors and IDF-NBFC shall appoint a Chief Risk Officer (CRO) with clearly specified role and responsibilities. The CRO is required to function independently so as to ensure the highest standards of risk management.

Boards of NBFCs with less than Rs.5000 Crores should strive to follow best practices in risk management.

Regulation No.

Provision

Action to be taken

96- Fit and Proper Criteria for the Directors

NBFCs shall ensure that a policy is put in place with the approval of the Board of Directors for ascertaining the ‘fit and proper’ criteria of the directors at the time of appointment, and on a continuing basis.

 

NBFC Shall obtain a declaration and undertaking from the directors giving additional information on the directors.

 

 

 

NBFC Shall obtain a Deed of Covenant signed by the directors.

 

 

(iv) Furnish to the Reserve Bank a quarterly statement on the change of directors and a certificate from the Managing Director of the NBFC that ‘fit and proper criteria’ in the selection of the directors has been followed. The statement must reach the Regional Office of the Department of Supervision of the Reserve Bank where the company is registered, within 15 days of the close of the respective quarter. The statement submitted by NBFC for the quarter ending March 31, shall be certified by the auditors.

 

Provided that the Reserve Bank, if it deems fit and in the public interest, reserves the right to examine the ‘fit and proper’ criteria of directors of any NBFC irrespective of the asset size of such NBFCs.

The policy on the ‘fit and proper’ criteria shall be on the lines of the guidelines contained in Annex XXIII of the Master Direction on SBR.

 

The declaration and undertaking shall be on the lines of the format given in Appendix XXIII-A of the Master Direction on SBR.

 

Deed of Covenant shall be in the format as given in Appendix XXIII-B of the Master Direction on SBR.

 

NBFC Shall submit the Statement of Change in Directors and Certificate that NBFC has followed the Fit and Proper Criteria in the selection of Directors. If there is no change in Directors, then a statement to that effect and Certificate shall be submitted accordingly. Statement & Certificate shall be signed by the Managing Director of the NBFC.

Regulation No.

Provision

Action to be taken

97- Key Managerial Personnel

Except for directorship in a subsidiary, Key Managerial Personnel shall not hold any office (including directorships) in any other NBFC-ML or NBFC-UL. A timeline of two years is provided with effect from October 01, 2022, to ensure compliance with these norms. It is  clarified that they can assume directorship in NBFC-BL.

KMP of NBFC shall not be appointed as Director or KMP in any other NBFC-ML or NBFC-UL.

98- Independent Director

Within the permissible limits in terms of the Companies Act, 2013, an independent director shall not be on the Board of more than three NBFCs (NBFCs-ML or NBFCs-UL) at the same time. Further, the Board of the NBFC shall ensure that there is no conflict arising out of their independent directors being on the Board of another NBFC at the same time.

A timeline of two years is provided with effect from October 01, 2022, to ensure compliance with these norms. There shall be no restriction to directorship on the Boards of NBFCs-BL, subject to provisions of the Companies Act, 2013.

Independent Director of ML-NBFC shall not act as Independent Director in more than three NBFCs-ML or NBFCs-UL.

Regulation No.

Provision

Action to be taken

99- Guidelines on Compensation of Key Managerial Personnel (KMP) and

Senior Management in NBFCs

In order to address issues arising out of excessive risk-taking caused by misaligned compensation packages, NBFCs are required to put in place a board-approved compensation policy. The policy shall at the minimum include:

  • constitution of a Remuneration Committee,
  • principles for fixed/variable pay structures, and
  • malus/clawback provisions

NBFC-ML shall formulate a Nomination and Remuneration Policy for KMP & Senior Management.

100- Framing of Internal Guidelines on Corporate Governance

NBFCs shall frame their internal guidelines on corporate governance with the approval of the Board of Directors, enhancing the scope of the guidelines without sacrificing the spirit underlying the guidelines in Chapter XI of the Master Direction on SBR and it shall be published on the company's website, if any, for the information of various stakeholders.

NBFC Shall formulate internal Corporate Governance Guidelines with the approval of the Board and the same shall be placed on the website of the Company.

106- Appointment of Internal Ombudsman

NBFCs fulfilling the criteria laid down under the circular on ‘Appointment of Internal Ombudsman by Non-Banking Financial Companies’ dated November 15, 2021 shall appoint the Internal Ombudsman and adhere to the corresponding guidelines.

COMPLIANCE FUNCTION AND ROLE OF CHIEF COMPLIANCE OFFICER (CCO) – NBFCs

October 1, 2023: Implementation of Compliance Function by NBFC-Middle Layer

RBI vide its circular dated April 11, 2022, introduced certain principles, standards and procedures for Compliance Functions including the appointment of a Chief Compliance Officer (CCO), to enhance Corporate Governance standards.

What is Compliance Risk?

Risk of legal or regulatory sanctions, material financial loss, or loss of reputation, as a result of an NBFC’s failure to comply with laws, regs, rules, and codes of conduct

Scope of Compliance Function

Strict observance of – all statutory and regulatory requirements, standards of market conduct, managing conflict of interest, treating customers fairly, and ensuring the suitability of customer service.

Responsibilities of Compliance Function

  1. Assist the Board to implement the compliance policy,
  2. Identify the compliance risk,
  3. Monitor and test compliance by performing compliance testing,
  4. Ensure compliance of regulatory/ supervisory directions given by RBI in both letter and spirit,
  5. Compliance with other regulators too,
  6. Constitution of a Compliance Department.

Broad Contours- Compliance Framework

  1. Formulation of a board-approved Compliance Policy,
  2. Compliance Department shall be headed by the CCO,
  3. Formulation of a Compliance Programme to identify and assess major compliance risks,
  4. CCO & Compliance Function to have the authority in respect of Compliance related issues,
  5. No dual hatting i.e., the CCO shall not be given any responsibility which brings conflict of interest,
  6. Compliance dept. staff shall have adequate knowledge and experience,
  7. Compliance Function shall be subject to regular internal audit,
  8. Examination of compliance rigor shall be a part of RBI’s supervisory risk assessment process.

Appointment and Tenure of CCO

  1. Tenure- Not less than 3 years,
  2. Removal-shall be transferred/removed before completion of the tenure only in exceptional circumstances,
  3. Rank- Senior Executive not below 3 levels from CEO
  4. Skills- Knowledge about Risk Management,
  5. Stature- Independent,
  6. Conduct- Clean track record,
  7. Selection process- On the basis of well-defined selection process,
  8. Reporting requirements- Prior intimation to the RBI and “Fit & Proper” certification,
  9. Reporting Lines- direct reporting lines to the MD & CEO and/or Board / Board Committee.

CORE FINANCIAL SERVICES SOLUTION (CFSS)

One of the requirements is the introduction of a Core Financial Services Solution (CFSS) for NBFCs vide RBI circular dated February 23, 2022 (‘CFSS Circular’).

CFSS, short for Core Financial Services Solution, is a regulatory requirement issued by the Reserve Bank of India (RBI) for Non-banking Finance Companies (NBFCs) in India. The mandate stipulates that NBFCs operating with 10 or more branches must implement the Core Banking Solution. This means that these NBFCs are obligated to adopt a centralized system to manage their financial services.

Furthermore, NBFCs with 10 or more fixed point service delivery units in the Upper Layer and Middle Layer are required to implement CFSS by September 30, 2025. However, for NBFCs with fewer than 10 fixed point service delivery units, the adoption of CFSS is not mandatory. Nevertheless, it is advisable for them to consider implementing CFSS as it can contribute to the smooth functioning of their business operations.

CFSS is a comprehensive platform that automates the complete operational process of NBFCs, ensuring a smooth and hassle-free customer experience. By integrating NBFC functions into a centralized database, CFSS provides anytime, anywhere services and accounting records. Additionally, the platform includes management information systems (MIS) for efficient regulatory reporting.

INDICATIVE LIST OF BALANCE SHEET DISCLOSURE AS PER ANNEX XXII OF MASTER DIRECTION ON SBR FOR NBFCS IN MIDDLE LAYER AND ABOVE:

Summary of Significant Accounting Policies:

NBFCs shall disclose the accounting policies regarding key areas of operations at one place along with Notes to Accounts in their financial statements. A suggestive list includes – Basis of Accounting, Transactions involving Foreign Exchange, Investments – Classification, Valuation, etc., Advances and Provisions thereon, Fixed Assets and Depreciation, Revenue Recognition, Employee Benefits, Provision for Taxation, Net Profit, etc.

  1. Capital
    • CRAR (%)
    • CRAR – Tier 1 capital (%)
    • CRAR – Tier 2 capital (%)
    • Amount of subordinated debt raised as Tier- 2 capital
    • Amount raised by issue of Perpetual Debt Instruments
  2. Investments
  3. Derivatives
    • Forward Rate Agreement/Interest Rate Swap
    • Exchange Traded Interest Rate (IR) Derivative
    • Disclosures on Risk Exposure in Derivatives (Qualitative Disclosures & Quantitative Disclosures)
  4. Assets Liability Management (Maturity pattern of certain items of Assets and Liabilities)
  5. Exposure
    • Exposure to Real Estate Sector
    • Exposure to Capital Market
    • Details of financing of parent company products
    • Details of Single Borrower Limit (SGL)/Group Borrower Limit (GBL) exceeded by the NBFC.
    • Unsecured Advances
  6. Registration obtained from other financial sector regulators.
  7. Disclosure of Penalties imposed by the Reserve Bank and other regulators.
  8. Related Party Transactions:
    • Details of all material transactions with related parties shall be disclosed in the Annual Report.
    • The NBFC shall disclose the policy on dealing with Related Party Transactions on its website and also in the Annual Report.
  9. Ratings assigned by Credit Rating Agencies and migration of ratings during the year.
  10. Remuneration of Directors.
  11. Management Discussion and Analysis Report: As part of the Directors’ report or as an addition thereto, a Management Discussion and Analysis report shall form part of the Annual Report to the shareholders. This Management Discussion and analysis shall include discussion on the following matters within the limits set by the company’s competitive position:
    • Industry structure and developments.
    • Opportunities and Threats.
    • Segment–wise or product-wise performance.
    • Outlook.
    • Risks and concerns.
    • Internal control systems and their adequacy.
    • Discussion on financial performance with respect to operational performance.
    • Material developments in the Human Resources/Industrial Relations front, including number of people employed.
  12. Net Profit or Loss for the period, prior period items, and changes in accounting policies: Since the format of the Profit and Loss account of NBFCs does not specifically provide for disclosure of the impact of prior period items on the current year’s profit and loss, such disclosures, wherever warranted, shall be made in the Notes to Accounts.
  13. Revenue Recognition: NBFC shall also disclose the circumstances in which revenue recognition has been postponed pending the resolution of significant uncertainties.
  14. Consolidated Financial Statements (CFS): NBFCs may be guided by general clarifications issued by ICAI from time to time. A parent company, presenting the CFS, shall consolidate the financial statements of all subsidiaries – domestic as well as foreign. The reasons for not consolidating a subsidiary shall be disclosed in the CFS. The responsibility of determining whether a particular entity shall be included or not for consolidation would be that of the Management of the parent entity. In case, its Statutory Auditors are of the opinion that an entity that ought to have been consolidated has been omitted, they shall incorporate their comments in this regard in the “Auditors Report”.
  15. Provisions and Contingencies: To facilitate easy reading of the financial statements and to make the information on all Provisions and Contingencies available at one place.
  16. Draw Down from Reserves
  17. Concentration of Deposits, Advances, Exposures, and NPAs:
    • Concentration of Deposits (for deposit-taking NBFCs)
    • Concentration of Advances
    • Concentration of Exposures
    • Concentration of NPAs
    • Sector-wise NPAs
  18. Movement of NPAs
  19. Overseas Assets (for those with Joint Ventures and Subsidiaries abroad)
  20. Off-balance Sheet SPVs sponsored.
  21. Disclosure of Customer Complaints.

REGULATIONS APPLICABLE FOR NBFC-BL

Leverage Ratio- The leverage ratio of NBFCs (except NBFC-MFIs, NBFCs-Middle Layer, and above) shall not be more than seven at any point of time.

Note: Leverage ratio means the total Outside Liabilities divided by Owned Fund.

Tier I capital – NBFCs primarily engaged in lending against gold jewellery (such loans comprising 50 percent of more of their financial assets) shall maintain a minimum Tier 1 capital of 12 percent of aggregate risk-weighted assets of on-balance sheet and of risk-adjusted value of off-balance sheet items. The treatment to on-balance and off balance sheet assets for capital adequacy shall be as provided in paragraphs 84 and 85 of Master Direction on SBR respectively. These NBFCs shall also adhere to provisions in paragraph 86 of Master Direction on SBR on the treatment of deferred tax assets and deferred tax liabilities for computation of capital.

Accounting Standards

NBFCs that are required to implement Indian Accounting Standards (Ind AS) as per the Companies (Indian Accounting Standards) Rules, 2015 shall prepare their financial statements in accordance with Ind AS notified by the Government of India and shall comply with the regulatory guidance specified in Annex II of Master Direction on SBR. Disclosure requirements for notes to accounts specified in Master Direction on SBR shall continue to apply. Other NBFCs shall comply with the requirements of notified Accounting Standards (AS) insofar as they are not inconsistent with any of the Master Direction on SBR.

Accounting for Investments

Quoted current investments shall, for the purpose of valuation, be grouped into the following categories, viz.

  1. equity shares,
  2. preference shares,
  3. debentures and bonds,
  4. Government securities including treasury bills,
  5. units of mutual fund, and
  6. others

Non-Cooperative Borrowers

All NBFC-Factors, NBFCs-D and non-deposit-taking NBFCs of asset size of ₹500 crore and above (Notified NBFCs) shall identify “non-cooperative borrowers”. A “non-cooperative borrower” is defined as one who does not provide necessary information required by a lender to assess its financial health even after two reminders, or denies access to securities etc. as per terms of sanction or does not comply with other terms of loan agreements within stipulated period; or is hostile/indifferent/in denial mode to negotiate with the NBFC on repayment issues; or plays for time by giving false impression that some solution is on horizon; or resorts to vexatious tactics such as litigation to thwart timely resolution of the interest of the lender/s. The borrowers shall be given 30 days’ notice to clarify their stand before their names are reported as non-cooperative borrowers.

With a view to discouraging borrowers/defaulters from being unreasonable and non-cooperative with lenders in their bonafide resolution/recovery efforts, NBFCs shall classify such borrowers as non-cooperative borrowers, after giving them due notice, if satisfactory clarifications are not furnished. Notified NBFCs shall be required to report classification of such borrowers to CRILC.

Policy on Demand/Call Loans:

The Board of Directors of NBFCs granting/intending to grant demand/call loans shall frame a policy for the company and implement the same.

Investment Policy:

The Board of Directors of NBFCs shall frame investment policy for the company and shall implement the same.

Loans against security of single product – Gold Jewellery

All NBFCs shall

(i) Maintain a Loan-to-Value (LTV) Ratio not exceeding 75 percent for loans granted against the collateral of gold jewellery;

Provided that the value of gold jewellery for the purpose of determining the maximum permissible loan amount shall be the intrinsic value of the gold content therein and no other cost elements shall be added thereto.

NBFCs shall not grant any advance against bullion/ primary gold and gold coins. The NBFCs shall not grant any advance for the purchase of gold in any form including primary gold, gold bullion, gold jewellery, gold coins, units of Exchange Traded Funds (ETF) and units of gold mutual fund.

Experience of the Board

Considering the need for professional experience in managing the affairs of the NBFCs, at least one of the directors shall have relevant experience of having worked in a bank/NBFC.

Risk Management Committee

In order that the Board is able to focus on risk management, NBFCs shall constitute a Risk Management Committee (RMC) either at the Board or executive level. The RMC shall be responsible for evaluating the overall risks faced by the NBFC including liquidity risk and shall report to the Board.

Loans to directors, senior officers, and relatives of directors

NBFCs shall have a Board approved policy on the grant of loans to directors, senior officers, and relatives of directors and to entities where directors or their relatives have major shareholding. The Board-approved policy shall include a threshold beyond which loans to above-mentioned persons shall be reported to the Board. Further, NBFCs shall disclose in their Annual Financial Statement, aggregate amount of such sanctioned loans and advances as per the template provided in the Annex XI of Master Direction on SBR.

Appointment of Statutory Central Auditors/Statutory Auditors

NBFCs shall adhere to the instructions contained in circular titled ‘Guidelines for Appointment of Statutory Central Auditors (SCAs)/ Statutory Auditors (SAs) of Commercial Banks (excluding RRBs), UCBs, and NBFCs (including HFCs)’ dated April 27, 2021, as amended from time to time. However, non-deposit-taking NBFCs with asset size below ₹1,000 crore have the option to continue with their extant procedure.

Raising Money through Private Placement by NBFCs

NBFCs shall follow the guidelines on private placement of Non-Convertible Debentures (NCDs) given in Annex XV of Master Direction on SBR. The provisions of the Companies Act, 2013 and Rules framed thereunder shall be applicable wherever not contradictory.

Entry into insurance business

For entry into insurance business, NBFCs shall make an application along with necessary particulars duly certified by their statutory auditors to the Regional Office of Department of Supervision of the Reserve Bank in whose jurisdiction the registered office of the NBFCs is situated.

NBFCs shall take up insurance agency business on fee basis and without risk participation, without the approval of the Reserve Bank subject to the certain eligibility conditions.

Issue of Co-branded Credit Cards

NBFCs registered with the Bank are allowed selectively to issue co-branded credit cards with scheduled commercial banks, without risk sharing, with prior approval of the Bank, for an initial period of two years and a review thereafter. NBFCs fulfilling the minimum eligibility requirements and adhering to certain stipulations are eligible to apply.

Ratings of financial products of NBFCs

NBFCs with asset size of ₹100 crore and above shall furnish information about downgrading/upgrading of assigned rating of any financial product issued by them, within fifteen days of such a change in rating, to the Regional Office of the Reserve Bank under whose jurisdiction their registered office is functioning.

Use of electronic payment system

NBFCs shall take proactive steps to increase 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.

GUIDELINES ON LIQUIDITY RISK MANAGEMENT FRAMEWORK FOR NBFC-BL

Non-deposit taking NBFCs with asset size of ₹100 crore and above, Core Investment Companies and all deposit taking NBFCs shall adhere to the guidelines as mentioned herein below. It will be the responsibility of the Board to ensure that the guidelines are adhered to. The internal controls required to be put in place by NBFCs as per these guidelines shall be subject to supervisory review. Further, as a matter of prudence, all other NBFCs are also encouraged to adopt these guidelines on liquidity risk management on a voluntary basis.

Liquidity Risk Management Policy, Strategies and Practices:

In order to ensure a sound and robust liquidity risk management system, the Board of the NBFC shall frame a liquidity risk management framework that ensures that it maintains sufficient liquidity48, including a cushion of unencumbered, high-quality liquid assets to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources. It shall spell out the entity-level liquidity risk tolerance; funding strategies; prudential limits; system for measuring, assessing, and reporting/reviewing liquidity; framework for stress testing; liquidity planning under alternative scenarios/formal contingent funding plan; nature and frequency of management reporting; periodical review of assumptions used in liquidity projection; etc. Key elements of the liquidity risk management framework are as under:

  1. Board of Directors:

The Board shall have the overall responsibility for management of liquidity risk. The Board shall decide the strategy, policies and procedures of the NBFC to manage liquidity risk in accordance with the liquidity risk tolerance/limits decided by it.

  1. Asset-Liability Management Committee (ALCO):

The ALCO consisting of the NBFC’s top management shall be responsible for ensuring adherence to the risk tolerance/limits set by the Board as well as implementing the liquidity risk management strategy of the NBFC. The CEO/ MD or the Executive Director (ED) should head the Committee. The Chiefs of Investment, Credit, Resource Management or Planning, Funds Management/ Treasury (forex and domestic), and Economic Research may be members of the Committee. The role of the ALCO with respect to liquidity risk should include, inter alia, the decision on the desired maturity profile and mix of incremental assets and liabilities, the sale of assets as a source of funding, the structure, responsibilities and controls for managing liquidity risk, and overseeing the liquidity positions of all branches.

  1. Public disclosure:

An NBFC shall publicly disclose information (Appendix VI-A of Master Direction on SBR) on a quarterly basis on the official website of the company and in the annual financial statements as notes to an account that enables market participants to make an informed judgment about the soundness of its liquidity risk management framework and liquidity position.

  1. Internal Controls:

An NBFC shall have appropriate internal controls, systems and procedures to ensure adherence to liquidity risk management policies and procedure. Management should ensure that an independent party regularly reviews and evaluates the various components of the NBFC’s liquidity risk management process.

Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement

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