icai-delhi nbfc 04-05-2013

7/22/2019 Icai-Delhi Nbfc 04-05-2013

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Non Banking Finance

CompanyICAI-DELHI

04-05-2013 CA Bhavesh Vora

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Topics Covered

Meaning of NBFC Classification of NBFCs

Types of NBFCs

Net Owned Funds requirement

Capital Adequacy Requirement

Concentration of Credits/Investments

Prudential Norms – NPA Provisioning Requirements

04-05-2013 ICAI-Delhi CA Bhavesh Vora

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Topics Covered

Other Important Norms Auditor‟s Report Directions, 2008

Returns Requirements

Core Investment Companies (CICs)

Formation Procedure

Recent Amendments


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Banks Vs. Non-Banks

Both are Financial Intermediaries

Banks Can:

Maintain Demand Deposits (savings/current Accounts)

Form a Part of Payment and Settlement Mechanism

Non-banks Can

Accept only term Deposits

Does not form Part of Payment and SettlementMechanism


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Classification of NBFCs

Mainly there are following types of NBFCs Asset Finance Company

Equipment Leasing

Hire Purchase Finance Investment Company

Loan Company

Core Investment Companies

Infrastructure Finance Companies Factor

Micro Finance Institutions

Infrastructure Debt Funds


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Classification of NBFCs

Asset Finance Company (AFC) would be defined asany company which is a financial institution carrying on as its principal business the financing of physicalassets supporting productive / economic activity.

The onus of including only eligible assets for thepurpose of classification as AFC shall be that of thecompany concerned.

Principal business - aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of

its total assets and total income respectively


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Classification of NBFCs……

Loan Companies (LC) means any company which is a

financial institution carrying on as its principal business the

providing of finance whether by making loans or advancesor otherwise for any activity other than its own but does

not include an Asset Finance Company

Investment Companies (IC) means any company which isa financial institution carrying on as its principal business

of acquisition of securities


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Types of NBFCs

Deposit accepting NBFCs.

Non deposit Accepting NBFCs

Systemically important (SI) Not systemically important NBFCs

„NBFC-ND-SI', means an NBFC not accepting / not holding Public Deposits and having total assets of Rs 100 crore

and above as shown in the last audited balance sheet.

NOF to be maintained at Rs. 200 lacs at all the time


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Steps for calculation of CRAR

Step I – Find out owned funds Step II – From Owned fund, derive Net

owned fund (Tier I Capital)

Step III – Find Tier II capital Step IV – Derive Total Risk Weighted

Assets (TRWA)

TRWA = Total Risk weighted assets of B/S and Off balancesheet items

CRAR = (Tier I+Tier II)/TRWA


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Maintenance of CRAR

CRAR (Capital to Risk Asset Ratio)

Capital in the form of Tier I and Tier II capital to be maintainedagainst total risk weighted assets.

Calculation of Tier I Capital (i.e. Net owned funds)

Sum of Share Capital (Paid up capital + Preference shares which are

compulsorily convertible into equity)

Free Reserves (Including General Reserves, Debentureredemption reserves, Capital Redemption Reserves, Creditbalance in P&L Account, Other Free reserves (to be specified))

Capital reserves representing surplus arising out of sale proceedsof asset + Balance in share premium account


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Calculation of CRAR…

Deduct from above

Deferred Revenue Expenditure

Reserves created by revaluation of assets

Accumulated loss balance Losses in the current period and those brought forward from

previous periods

Book value of Intangible assets

Deferred Tax Asset

The Resultant Figure will be “Owned Funds”


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Further deduct from the “Owned Funds”…

Investments in shares of other NBFCs, Investments in shares,debentures, bonds, outstanding loans and advances including

hire purchase and lease finance made to and deposits withsubsidiaries and companies from the same group exceeding, inaggregate, 10% of the owned fund

Perpetual debt instruments issued by a NBFC-ND-SI to the

extent not exceeding 15% of the aggregate Tier I capital - as on31st March of Previous Accounting Year

The result is Tier I capital (Net Owned Fund)


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Calculation of Tier II capital (Aggregate of Below items) Preference shares other than those which are

compulsorily convertible into equity

Revaluation Reserves (RR) - 45% is only taken incalculation of tier II capital

General Provisions and Loss Reserves to the extentthese are not attributable to actual diminution in valueor identifiable potential loss in any specific asset andare available to meet unexpected losses, to the extentof one and one fourth (1.25) percent of risk weightedassets. (Include provisions on standard assets)


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Cont…

Hybrid Debt Capital Instruments

Perpetual debt instruments issued by a SI-ND

NBFC which is in excess of what qualifies for Tier ICapital

Subordinated Debts

Result is Tier II capital

Tier II cannot be greater than

Tier I capital for calculation of capital adequacy


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Calculation of Risk Assets Weights assigned as below

Asset Weight Amount Weighted

Amt

Fixed Assets 100 500 500

Bonds of Public SectorBanks

20 500 100

Investment in PDI of NBFCs

100/0 500 500

Shares/Debenture/CPs/Bonds

100 500 500

Cash and Bank 0 20 0


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Calculation of Risk Assets

Asset Weight Amount Weighted Amt

Stock on Hire 100 500 500

Inter CorporateLoans/Deposits

100 500 500

Loans to staff 0 50 0

Other Securedloans and Adv

100 200 200

Total 2800


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Risk Weights for Off Balance sheet

items

Conversion Factor (Weights) are assigned for off balance sheet

items as follows

Cash margins/deposits shall bededucted before applying the conversion factor.

Financial and other guarantees, partly paid shares /debentures,

bills discounted /rediscounted /Lease contracts entered intobut yet to be executed

100%

Shares/Debentures underwriting obligations & Other

Contingent Liabilities (To be specified in the calculation)50%


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Important Notes for CRAR

Calculation

(1) Netting may be done only in respect of assets where provisionsfor depreciation or for bad and doubtful debts have been made.

(2) Can net off the amount of cash margin/caution money/security deposits (against which right to set-off is available) held ascollateral against the advances out of the total outstanding exposure of the borrower.

Assets which have been deducted from ownedfund to arrive at net owned fund shall have

a weightage of „zero‟


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Important Notes for CRAR

Calculation….. Revised Capital Adequacy Framework for

Off-Balance Sheet Items for NBFCs has beenannounced by RBI which needs to be adhered

to while calculating off balance sheet exposure

NBFCs primarily engaged in lending againstgold jewellery (such loans comprising 50 percent

or more of their financial assets) shall maintain aminimum Tier l capital of 12 percent by April01, 2014


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Concentration of Credit/Investment(NBFC-D and NBFC-ND-SI)

To formulate a policy in respect of exposure to asingle party/a single group of parties

Not to lend – (a) to any single borrower exceeding 15% of itsowned funds and (b) to any single group of borrowers exceeding 25% of its owned funds

Not to Invest in -

(a) the shares of another company exceeding 15%of its owned funds (b) the shares of single groupof companies exceeding 25% of its owned fund


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Concentration of Credit/Investment(NBFC-D and NBFC-ND-SI)

Not to lend and Invest (loans and investmentstaken together) exceeding

(a) 25% of its owned fund to a single party and

(b) 40% of its owned fund to a single group of parties

Note: Any systemically important non-deposit taking non-

banking financial company not accessing public funds, eitherdirectly or indirectly, or not issuing guarantees may make anapplication to the Bank for an appropriate dispensationconsistent with the spirit of the exposure limits.


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Provisioning Norms

Classification of Assets

Standard Assets

Interest and Principal Repayment

are regular Sub-standard assets

Doubtful Assets

Loss Assets


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Provisioning Norms…

Standard Assets 0.25% of standard assets (Notification dated 17th January, 2011)

Sub standard assets Non performing assets for a period of 18 months. Renegotiated loans

upto one year of satisfactory performance of new terms. Provide 10% on the outstanding amount No specific provisions regarding Security

Doubtful Assets Remains sub standard asset for period of 18 months and above

Provide 100% of uncovered outstanding amount To the extent of unsecured loan which is covered by value of realizable

securities, the provisioning required based on the period the asset hasremained doubtfuli. upto one year - 20%, ii. one to three year - 30%, iii. more than threeyears - 50%


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Provisioning Norms…

Loss Assets

Identified by the Company, its Auditors or RBI(Period is not specified) or

Potential threat of Non Recoverability due toerosion in the value of securities or non availability of security or any fraudulent act or omission on thepart of the borrower

100% Write off in the books

(Same treatment for the Interest)


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Other Important Norms..

(All NBFCs) Certain disclosures should be made in the Balance sheet as per

format prescribed Provisions for bad and doubtful debts

Provisions for depreciation in investments

Disclosure in balance sheet only for NBFC-ND-SI Capital to Risk asset ratio (CRAR)

Exposure to real estate sector, both direct and indirect and

Maturity pattern of assets and liabilities

For all NBFCs - Transfer of 20% profit to Special Reserves (RBI

Act) Schedule to be appended to the balance sheet in notes to

accounts (Format is prescribed)


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Other Important Norms..

(All NBFCs)Submission of certificate from statutory auditors

Certificate at the end of FY certifying the eligibility of the company to hold Certificate of Registration as

NBFC Certificate to indicate asset and income pattern

To be given within one month from the finalisation of the balance sheet not later than 30th Dec. in any case

"Every non-banking financial company

shall finalise its balance sheet within a period of

3 months from the date to which it pertains"


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Asset Income Pattern

In order to identify a particular company as an NBFC,consider both, the assets and the income pattern -from the last audited balance sheet to decideprincipal business.

Fixed Deposits with Banks are not considered as

Financial Assets (RBI Notification no. 259)

Financial Assets are more than 50 per cent

of its Total Assets (netted off by Intangible Assets)

Income from financial assets should bemore than 50 per cent of the gross income

AND

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For Attention of Auditors:

Auditor‟s Report :

Auditors to submit additional Report to theBoard of Directors

The auditor shall also make a separate report to

the Board of Directors of the Company


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Auditor‟s Report…

Matters to be included in the auditor‟s report

The auditor‟s report (Issued to Directors) on theaccounts of a NBFC shall include a statement on thefollowing matters, namely:

In the case of all non-banking financialcompanies

I. Whether the company is engaged in the business of NBFI and whether it has obtained a Certificate of Registration (CoR) from the Bank


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II. In the case of a company holding CoR issued by theBank, whether that company is entitled to continue tohold such CoR in terms of its asset/income pattern as

on March 31st

of the applicable year.

III. If the company is classified as AFC, Whether theNBFC has been correctly classified as AFC as definedin RBI Directions with reference to the businesscarried on by it during the applicable financial year.


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In the case of an NBFC-ND

The auditor shall include a statement on: -

i. Whether the Board of Directors has passed aresolution for non- acceptance of any publicdeposits.

ii. Whether the company has accepted any public

deposits during the relevant period/year;iii. Compliance with the prudential norms


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Additional Reporting in respect of NBFC-ND-SI

(a) Calculation and compliance with Capitaladequacy requirements

(b) Whether annual statement of capital funds, risk

assets/exposures and risk asset ratio (NBS-7) wasfurnished to the bank within the stipulated period


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Other Requirements:

1. Reasons to be stated for unfavourable orqualified statements

2. Obligation of auditor to submit an exceptionreport to the Bank (RBI)

Auditor to make a report to the regional office

containing the details of unfavorable or qualified statements and about the non-compliance, as thecase may be, in respect of the company


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Returns Requirements For NBFC-ND-SI (Apart from returns applicable to all

NBFCs of any asset size) Monthly Return on Financial Parameters Monthly NBS-ALM-1 for Short Term Dynamic

Liquidity

Half Yearly NBS-ALM-2 for Structural Liquidity, NBS- ALM-3 for Interest Rate Sensitivity

NBS – 7 Quarterly return on Capital Funds, Risk Assets Monthly Reporting if Raised short term foreign currency

borrowings Fraud Reporting – as and when detected FMR I and

Quarterly in FMR II, III for Fraud outstanding, Progressreport respectively


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Returns Requirements.cont…

Quarterly return on important financialparameters for NBFC having asset size between50-100 crores

Note: Above is indicative list of important returnsand the same is not exhaustive, one has to see thedetailed list based on the asset size and type of theNBFC.


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What is CICs?:

(i) Holds not less than 90% of Net Assets in group companies;

(ii) Investments in equity shares in group companies constitutes not

less than 60% of its Net Assets; (Net asset defined in Directions)(iii) It does not trade in its investments except through block sale

for the purpose of dilution or disinvestment;

(iv) It does not carry on any other financial activity except some

specified acts

CIC is considered SI only if raising/holding public funds AND Total Assets of Rs. 100 crore or above


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For CIC-ND-SI Capital Requirements: minimum capital ratio. i.e.

Adjusted net worth at all time shall not be less than 30%of its aggregate Risk Weighted Assets and Risk adjusted

value of off balance sheet as at the last balance sheet date

Leverage Ratio: Outside liabilities at all times shall notexceed 2.5 times its Adjusted Networth as on the date if

the last audited balance sheetExemptions Given: (i) CIC-ND-SI are exempted from para 15, 16and 18 of the NBFC Norms, 2007 and ii) Norms 2007 not apply for CIC-NDs (Other than systemically important)


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RBI has Announced Core Investment Companies -Overseas Investment (Reserve Bank) Directions, 2012for CICs making investments abroad, opening

branches, representative offices, undertaking joint ventures, etc. abroad. The same needs to be followed.

RBI has also separately issued guidelines for entry of Core Investment Companies in insurance sector


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Formation Procedure

A company with main object clause/ancillary clause forcarrying out NBFI activities (check object clause)

Obtain checklist of requirements from RBI website

Fill up prescribed form, available on RBI website,according to instructions with the requirements

Fill up the e-form provided in excel format

Get the required certifications of the statutory auditors/chartered accountants (as the case may be)

Submit softcopy on RBI website before submission of the hard copy.


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Formation Procedure…Cont

Obtain the printout of successful submission of thesoftcopy. Mention the date of submission on the print if date is not appearing on print.

Submit the hardcopy application in duplicate to regionaloffice of RBI

Each page in the application file should be numbered

Prepare the application in triplicate so that a replica is

with the applicant for future reference.


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Recent Amendments

NBFCs need to display grievance redressalmechanism and contact details of grievanceredressal officer at prominent place in

offices/branches/places of business

Fair Practices Code (which should preferably inthe vernacular language as understood by the

borrower) based on the guidelines announcedshould be put in place by all NBFCs with theapproval of their Boards


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Recent Amendments…cont…

Revision in format for submission of returns forPMLA compliances and Uploading of Reportsin 'Test Mode' on FINnet Gateway for PMLA

Reporting Facility to NBFC-ND-SI - Direct Access to

Negotiated Dealing System-Order Matching

Change in Loan to Value ratio for companiespredominantly in loan against gold products


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Amendments to definition of infrastructure loan

NBFCs cannot become partners in partnershipfirms

Review of Guidelines on entry of NBFCs intoInsurance Business

RBI issued “NBFC (Opening of

Branch/Subsidiary/Joint Venture/RepresentativeOffice or Undertaking Investment Abroad by NBFCs) Directions, 2011”


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Guidelines for Credit Default Swaps - NBFCs asusers

Revision in External Commercial Borrowings

(ECB) Policy – Infrastructure FinanceCompanies (IFCs)

Guidelines on classification of frauds, approach

towards monitoring of and reporting system forfrauds for deposit taking NBFCs to apply forNBFC-ND-SI also.


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Non Banking Finance

CompanyICAI-DELHI

icai-delhi nbfc 04-05-2013

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