Frequently Asked Questions

The Reserve Bank of India is entrusted with the responsibility of regulating and supervising the Non-Banking Financial Companies by virtue of powers vested in Chapter III B of the Reserve Bank of India Act, 1934. The regulatory and supervisory objective, is to:

1. ensure healthy growth of the financial companies;
2. ensure that these companies function as a part of the financial system within the policy framework, in such a manner that their existence and functioning do not lead to systemic aberrations; and that
3. the quality of surveillance and supervision exercised by the Bank over the NBFCs is sustained by keeping pace with the developments that take place in this sector of the financial system.

In view of the significant growth registered by the NBFC segment during the last decade, the powers of the Bank were enhanced by amending the provisions of the Act during 1997 to facilitate regulation and supervision by RBI covering several aspects of the activities of the NBFCs. Following the amendments to Chapter IIIB of the Act, the Bank has since introduced a new regulatory framework effective January 31, 1998 which directs the focus of the regulatory-cum-supervisory attention primarily on the NBFCs which accept deposits from the public.

The changes introduced in the regulatory framework are comprehensive and broadbased and it has been felt necessary to explain the rationale underlying these changes and provide clarification on certain operational matters for the benefit of the NBFCs, members of public, rating agencies, audit profession, the different Associations of the NBFCs etc. To meet this need, this booklet in the form of questions and answers, is being brought out by the RBI (Department of Non-Banking Supervision) with the hope that it will provide better understanding of the new regulatory framework.

(V.S.N. Murty)
Chief General Manager

RESERVE BANK OF INDIA,
DEPARTMENT OF NON-BANKING SUPERVISION,
CENTRAL OFFICE,
MUMBAI

FEBRUARY 16, 1998

1. All the NBFCs are required to seek Registration with RBI irrespective of whether they accept public deposits or not. However, certain types of financial companies viz., insurance companies, housing finance companies, stock broking companies, chit fund companies, companies notified as `nidhis’ under section 620A of the Companies Act and the companies engaged in merchant banking activities (subject to certain conditions), have been exempted from the requirement of Registration under the Reserve Bank of India Act.

17. 2. A new company cannot commence business until it has been granted a Certificate of Registration by the Reserve Bank of India. However, the basic eligibility criterion for Registration of a new NBFC is that it should have minimum Net Owned Fund (NOF) of Rs. 25.00 lakhs. What use could the company make of the idle funds until it is granted the certificate of registration by RBI ?

1. The company can keep its capital funds invested in any type of deposits with a bank until it is granted a Certificate of Registration by RBI enabling it to commence its business as a financial institution. Investment in any other type of securities will attract the provisions of section 45-I(c) of the RBI Act.

17. 3. Some of the companies which were in existence on January 9, 1997 could not submit their Application for Registration before the due date i.e. July 8, 1997. Whether these companies can carry on their business ?

1. All the NBFCs which were incorporated before January 9, 1997 were required to submit their Application for Registration with RBI within 6 months i.e. by July 8, 1997. The companies which failed to make such an application cannot carry on their business of a financial institution. Any violation of this provision would render the companies and their management liable for penal action under the provisions of Reserve Bank of India Act, 1934.

17. 4. Whether under-provisioning or non-provisioning against the non-performing advances and/or decline in the value of investments as per the provisioning requirements of the Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 should be reduced from the Owned Fund before computing the Net Owned Fund of the company, for the purpose of Registration?

1. Yes. To the extent provisions have not been made against any asset, as required under the Prudential Norms Directions or assessed by the Management, Auditor of the Company or an Inspecting Officer of the Reserve Bank of India, the asset can be considered to be intangible asset. Although the entire asset against which the provisions have not been made does not become intangible asset, the amount of provision required to be made as per the Prudential Norms Directions should be deducted from the Owned Fund of the Company to determine the Net Owned Fund of Rs. 25.00 lakhs required for Registration under the RBI Act.

• Unsecured debentures
• Inter-Corporate Deposits (ICDs)

• Money received in trust
• Security deposits from employees
• Equated Monthly Investments (EMI) received in advance against lease/hire purchase finance.

1. Unsecured debentures issued to the shareholders by a public limited company and to the general members of public by public and private limited companies are included in the definition of `public deposit’. However, unsecured debentures issued to other companies and banks/all India financial institutions are not public deposit. The money received in trust is no longer an exempted borrowing and hence forms part of the public deposit. However, other borrowings by way of ICDs, security deposits from employees (provided these are deposited in an account with a bank or a post office, jointly with the employee) and advance receipt of lease or hire purchase instalments, are exempted borrowings and hence fall outside the purview of public deposit.

17. 6. Whether deposits received from relatives and friends of the directors are reckoned as public deposits?

1. Money received by a private limited NBFC from relatives and friends of directors who are not its shareholders, is public deposit. In the case of public limited companies, the deposits received from shareholders also are public deposit.

17. 7. What is the status of optionally fully convertible debentures in `public deposits’?

A. Optionally Fully Convertible Debentures (OFCDs), which were brought within the purview of Regulations in the year 1996, have now (in 1998) been taken out of the Regulations. Any money raised by issue of OFCDs is not to be treated as public deposit.

17. 8. Whether secured debentures could be partly secured for the purpose of exemption from NBFC Directions ? What happens if the value of security behind the secured debentures declines after the date of issue ?

1. For the purpose of exemption from NBFC Directions, (1998) on Acceptance of Public Deposits, the debentures are required to be fully secured on the date of issue and to the fullest satisfaction of the trustees.

17. 9. The deposits from a foreign citizen are not to be treated as public deposit. What is the status of the deposits from an NRI ?

1. An NRI can be an Indian national or a foreign national of Indian origin. If the depositor is an NRI holding a foreign passport, he is to be treated as foreign national despite the fact he is of Indian origin. It is for the depositor to disclose to the company that he is a foreign citizen and for the company to keep on its record an evidence that it had received deposit from a foreign citizen to claim the exemption from the Non-Banking Financial Companies (Reserve Bank) Directions, 1998 on Acceptance of Public Deposits.

17. 10. Whether External Commercial Borrowings (ECBs) are exempted borrowings i.e. outside the purview of public deposit ?

1. Subject to the Exchange Control Regulations, the NBFCs can receive external commercial borrowings from foreign Overseas Corporate Bodies, individuals, FIIs, and other trusts or persons. The moneys received from all these sources are excluded from the definition of public deposit as per the provisions of NBFC Directions. However, Indian companies are required to obtain prior approval of the Exchange Control Department for acceptance of deposits from non-residents.

1. The prudential norms relating to income recognition, accounting standards, asset classification, provisioning against bad and doubtful debts are the norms which have a bearing on disclosure of true and fair picture of the financial health of the NBFC. These companies normally borrow from other corporate bodies as also from banks and financial institutions. These are also the companies which may commence accepting public deposits at short notice. It is necessary that their Balance Sheets on which all the lenders would rely should be transparent and clean, else these companies would be able to inflate their profits and conceal the decline in the value of their investments as also unprovided NPAs. Such companies might turn out to be potential defaulters in servicing their borrowings from the financial system. The exemptions from capital adequacy and credit/ investment concentration norms have been given because public deposits are not involved.

17. 12. Core investment companies are required to comply with three basic conditions. What happens if a company complies with two of the three conditions ?

1. The investment companies which have at least 90 per cent of their total assets (not total investments alone) in the securities issued by their group/subsidiary/holding companies are the core investment companies. The other two conditions are that they should not accept public deposits and should not trade in these shares. All the three conditions are required to be complied with fully. If any company fails to comply with even one of these three conditions, it is not entitled to the total exemptions from the provisions of Reserve Bank Directions on Acceptance of Public Deposits and Prudential Norms. In such a situation, the company would fall either in the category of public deposit taking company (if it has accepted public deposits) and be subject to all the regulations of RBI or in the category of general investment company and be subject to prudential norms to the extent these are applicable to it.

1. The definition of NOF has been provided in Section 45IA of the Reserve Bank of India Act, 1934. This definition would be applicable to the computation of minimum capital fund for the purpose of Statutory Registration of an NBFC with the Reserve Bank of India.

17. 14. The earlier ceiling on borrowings by NBFCs was 10 times the NOF. What are the present ceilings?

17. 15. Whether an NBFC with entitlement of accepting public deposits as per the revised Regulations and holding deposits much above the level, can still accept fresh deposits ? If so, what are the conditions ?

1. All the Rated Companies have been allowed 3 years’ time to regularise their excess deposits by repayment or otherwise. During this period, while a company can accept fresh deposits and renew such maturing deposits subject to reducing the excess holding of public deposits by one-third at the end of every calendar year beginning December 1998. However in such a case, the company should not exceed the level of public deposits outstanding as at the close of business on January 1, 1998. The unrated and underrated NBFCs are not entitled to accept fresh deposits.

17. 16. Whether a company not complying with the prudential norms can raise public deposits ?

Inter-corporate deposits (ICDs)

17. 17. If a company being a shareholder of a public limited NBFC gives deposit or loan to the latter one, whether such a loan is to be treated as public deposit or ICD ?

1. The objective of exempting the intercorporate deposits from the purview of Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 is that the corporate bodies whether a shareholder or a non-shareholder should be able to appraise the loan proposals and ensure the safety of the funds lent. Hence, such loans will be treated as ICDs.

17. 18. Whether the earlier ceiling on inter-corporate deposits (ICDs) at two times the NOF has been abolished ?

1. Yes. Under the new NBFC Directions, an NBFC can accept ICDs without any ceiling subject, however, to the limit set by Capital Adequacy Norms applicable to it.

17. 19. Whether the ICDs can be accepted for any period ?

1. Yes. The ICDs not being public deposit are not governed by the minimum and maximum period applicable to public deposit.

17. 20. Whether ICDs can be accepted repayable on demand ?

1. As per provisions of the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998, the prohibition from acceptance of deposits repayable on demand applies to public deposits only. ICDs are not public deposits. As such, ICDs can be accepted repayable on demand or notice.

17. 21. The nidhi companies have been precluded from accepting deposits in the nature of a Current Account. Whether they can open Savings Bank Account ?

17. 22. Whether the freedom from ceiling on interest rate allowed to the nidhi companies shall continue as hitherto ?

1. Yes. However, exemption from the ceiling on interest rate applies only to those nidhi companies which comply with the conditions stipulated by RBI in January 1997 and to which exemption certificates have been issued by RBI.

1. The new classification norms shall come into effect on the basis of NBFCs Balance Sheet as on March 31, 1999. The classification of an NBFC into a specific sub-group is decided on the basis of its principal business as disclosed in its latest audited Balance Sheet and Profit & Loss Account.

1. The NBFCs have been allowed sufficient time to achieve the ratio of 60 per cent of its net assets and derive its net income from these activities taken together. Therefore NBFCs are not expected to face much difficulty in achieving these norms.

17. 25. For arriving at the composition of assets and income in the equipment leasing and hire purchase finance activities, please clarify whether the ratio should be correlated to the gross assets/gross income or net assets/net income ?

1. The NBFCs in the category of equipment leasing and hire purchase finance companies are allowed higher leveraging of their NOF for accepting public deposits as compared to the loan and investment companies. As a result, the classification into sub-groups of the NBFCs is relevant only for the purpose of ceiling on public deposits.

17. 27. How will the NBFCs meet the stipulation of bringing down their deposit portfolio in alignment with the new regulations?

1. The NBFCs have been permitted to regularise their excess public deposits by 1/3^rd every year so as to pay off/regularise by obtaining/improving their Credit Rating or by augmenting NOF or by substituting public deposits by other form of debt the entire excess by 31st December, 2000. While the companies having the prescribed minimum level of Rating can accept fresh public deposit and renew such maturing deposit, the NBFCs which are unrated or rated below the minimum grade can only renew the maturing deposits.

Credit Rating

17. 28. Are companies having Ratings less than the minimum Investment Grade, eligible to accept public deposits?

1. The NBFCs in the category of equipment leasing and hire purchase finance companies having Rating of less than the Investment Grade as mentioned below are no longer entitled to accept fresh public deposits :

The Loan and Investment Companies having Rating of less than `A’ are no longer entitled to accept fresh deposits.

It may be added that A- is not equivalent to A; AA- is not equivalent to AA and AAA- is not equivalent to AAA.

1. No. If any NBFC has not obtained the minimum prescribed Credit Rating, it is not entitled to raise public deposits

1. An NBFC that has been rated by two agencies, is free to use the rating beneficial to it. In case of wide variation between the two Ratings, RBI can take up the matter with both the Credit Rating Agencies to review and rationalise their opinion about the company’s Rating.

17. 31. One common practice has been noticed among the NBFCs that if the Rating awarded by one Agency is not satisfactory to them, the company does not accept the Rating and approaches another agency for the purpose. It is also alleged that the NBFC arranges to get a higher Rating. Is there any method by which RBI can come to know of the names of the companies Rated and the level of Rating given to them by the Agencies irrespective of whether the Rating has been accepted or not ?

1. The Rating Agencies have incorporated a clause in their agreements with the NBFCs that they can disclose the Rating to the regulatory authorities viz. RBI. The RBI has started getting the information from the Agencies.

1. If Rating of an NBFC is downgraded, it has to bring down deposits to the level to which it is entitled to as per the new Credit Rating within a period of one year.

17. 33. Rating Agencies use different symbols for their Investment Grade Rating. Is it possible for the common man to understand the strength of the company on the basis of these symbols ?

1. Reserve Bank of India has specified the minimum level of investment grade Rating for eligibility for acceptance of deposits from public by Equipment Leasing/Hire Purchase Finance Companies. However, the Rating Agencies have been advised to bring about uniformity in their Rating Levels for the common man to understand the meaning of a particular Rating.

17. 34. What is the period of validity of a company’s Rating ?

1. The Reserve Bank has stipulated that the Credit Rating should be obtained by the NBFCs once in a year. Normally, the Credit Rrating of a company is valid till it is reviewed by the concerned Rating Agency.

17. 35. If the company questions the Rating given to it, to whom can it appeal ?

Liquid Asset requirement

17. 36. Whether the liquid assets are required to be maintained only on the principal amount of public deposits or the interest accrued on such deposits should be included in the deposit liabilities?

1. The liquid assets are required to be maintained in relation to the deposit outstanding together with the amount of interest accrued but not paid.

1. The minimum level of liquid asset between January 1 and March 31, 1998 remains unchanged at 10 per cent and 5 per cent of the regulated deposits outstanding as on September 30, 1997 for equipment leasing/hire purchase finance companies and loan/investment companies respectively, depending upon their Registration status under erstwhile Registration Scheme. However, on and from April 1, 1998, the requirement of liquid assets would be uniform for all these NBFCs except RNBCs at 12.5 per cent of the "public deposits". The ratio will be 15 per cent of public deposits on and from April 1, 1999. For RNBCs, the ratio shall remain unchanged at 10 per cent of the deposits outstanding.

1. No. An NBFC is required to invest in approved securities a part of the deposits, for compliance with the provisions of section 45IB of the RBI Act. The term `approved securities’ has been defined in the RBI Act itself which means the Government securities and Government guaranteed bonds. Hence it is not permissible for the NBFCs to maintain a part of the securities in the form of investments in bonds of and deposits with banks.

17. 39. The securities meant for maintaining the liquid assets are required to be valued at their market value. What should be the value for the unquoted Government securities?

1. The unquoted Government securities are to be valued at their carrying cost. The term `carrying cost has been defined in the Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 to mean the net book value of the asset and interest accrued thereon but not received.

17. 40. The liquid asset securities are required to be lodged with a scheduled commercial bank for the purpose of safeguarding the depositors’ interest. Whether a company can lodge these securities at two places or with two banks ?

1. The liquid assets securities can be lodged with one bank branch only and at one place only. However, the company has the discretion now to keep such securities with a bank branch either at the place of its registered office or at another place of its choice after taking prior approval of the concerned Regional Office of RBI.

17. 41. Can the securities held by an NBFC with the designated bank branch in the concerned bank’s Constituents’ SGL Accountl be treated as investments in liquid assets for the purpose of the provisions of Section 45IB?. If so, whether approved securities in physical form held by the NBFC towards part compliance of the liquidity requirement can be lodged with another bank branch?.

17. 42. The companies have been advised to obtain prior approval of the Regional Office of the Reserve Bank of India if it is intended to lodge the securities with a bank branch at a place other than the place of its Registered Office. Please explain the purpose behind it.

1. Most of the companies are unitary entities. They function from the place of their Registered Office. Some of the large sized companies as also some others may intend to keep the securities at metropolitan centres for operational advantages. The place where the securities are held could be outside the jurisdiction of the concerned Regional Office of RBI because the jurisdictional areas are decided on the basis of place of location of the Registered Office of the companies. In such cases, it is imperative for the Regional Offices to know the place where the securities are being kept.

17. 43. What are the responsibilities of the NBFCs accepting/holding public deposits with regard to submission of Returns and other information to RBI?

1. The NBFCs accepting public deposits shall furnish to RBI

1. Certificate from the Auditors regarding solvency of the company in repayment of the deposits as and when the claims arise;
2. Balance Sheet and the Auditors’ Reports submitted to the Board of Directors as also to the Shareholders of the company;
3. Statutory Annual Return on deposits in the First Schedule;
4. Quarterly Return on liquid assets;
5. Half-yearly Return on prudential norms; and
6. a copy of the Credit Rating once a year alongwith one of the Half-yearly Returns on prudential norms as at (v) above.

17. 44. What are the documents or the compliance required to be submitted to the Reserve Bank of India by the NBFCs not accepting/holding public deposits ?

1. The NBFCs except RNBCs not accepting/holding public deposits are not required to submit to RBI their Statutory Returns in the First Schedule or the Balance Sheet or the Quarterly Liquid Asset Return or the Half-yearly Prudential Norm Return.

17. 45. The NBFCs have been made liable to pay interest on the overdue matured deposits if the company has not been able to repay the matured public deposits on receipt of a claim from the depositor. Please elaborate the provisions.

1. There had been instances when some companies had not paid matured deposits on due dates and such claims have been honoured after some delay. The companies did not pay any interest for the delayed period in the absence of any specific provisions in the Reserve Bank Directions in this regard in the past. A provision has, therefore, been inserted subsequently in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions dated 31.1.1998 to the effect that interest is payable to the depositors only in case the company has delayed the repayment of matured deposits, from the date of receipt of such claim by the company or the date of maturity of the deposit whichever is later, till the date of actual payment. If the depositor has lodged his claim after the date of maturity, the company would be liable to pay interest for the period from the date of claim till the date of repayment. In other words, for the period between the date of maturity and the date of claim it is the discretion of the company to pay interest.

17. 46. What is the purpose of including in the Application Form, the address of the bench of the Company Law Board ?

17. 47. Can a company pre-pay its public deposits ?

1. An NBFC accepts deposits under a mutual contract with its depositors. In case a depositor requests for pre-mature payment, Reserve Bank of India has prescribed Regulations for such an eventuality in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998. However, premature repayment of deposits is the sole discretion of the company concerned. In other words, if the company agrees to pre-pay deposits at the request of the depositor, the depositor and the company are deemed to have mutually agreed to amend the terms of contract.

Prudential Norms

17. 48. Whether Income Recognition Norms for lease and hire purchase assets envisage for past due period of 30 days beyond the period upto which the income is allowed to be recognised on accrual basis ?

1. The concept of `past due’ is applicable to the income from loan and other credit facilities viz. receivables, other dues, etc. However, the lease rentals and hire purchase installments have been allowed to accrue upto 12 months and the concept of `past due’ is not applicable in respect of these assets.

17. 49. Please explain the concept of valuation of quoted investments .

1. Each category of quoted investments is to be valued scrip-wise. Category of investment means the different types of securities under each head viz. equity shares, preference shares, debentures, bonds and Government securities. Only quoted investments can be classified as long term or current investments. The long term investments are allowed to be valued as per AS-13 of the ICAI but the current investments are required to be valued at their market price. However, the NBFCs have been permitted under Prudential Norm Directions, the facility of block valuation method for accounting for the investments. The net of depreciation and the appreciation in the value of the current quoted investments, is only required to be charged to the Profit and Loss Account of the current year. The appreciation in the value of current investments in any category cannot be booked as profit. The concept of block valuation is explained below :

Total appreciation Rs. 80/-

Total depreciation Rs. 120/-

Total appreciation Rs. 120/-

Total depreciation Rs. 80/-

Net appreciation Rs. 40/- to be ignored.

This appreciation in the value of equity shares cannot be adjusted against the depreciation in the value of any other category of securities.

17. 50. Please elaborate with illustration the concept of `earning value’.

17. 51 What is the concept of break up value and fair value for accounting of unquoted shares ?

1. The Prudential Norms have prescribed that the unquoted shares should be valued at break up value. However, an NBFC can also value these shares at fair value, if it so desires.

17. 52 Whether the credit concentration norms are applicable to commercial transactions only or are applicable to the advance deposit with the landlords, other authorities and for other purposes, as well?

1. The credit concentration norms are applicable to commercial transactions only. Advance deposits of money as security for performance of some contract between the two parties, like office premises, advance deposits with the Government authorities towards services, etc. are not governed by the credit concentration norms.

17. 53. Whether the Prudential Norm Return can be certified by any Chartered Accountant ?

1. No. The Prudential Norm Return should be certified by the company’s Statutory Auditors only and not by any other Chartered Accountant.

1. The NBFCs are allowed to accept public deposits in any form only for periods ranging between 12 months and 60 months.
2. NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 16 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests.
3. NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.

1. Note that all public deposits are unsecured.
2. Insist on a proper deposit receipt which should, besides the name of the depositor/s state the date of deposit, the amount in words and figures, rate of interest payable and the date of maturity.
3. Amounts taken under any other nomenclature may not be treated as public deposits and may not be governed by RBI regulations.

17. 60. Why regulations have not been framed for another class of NBFCs viz. RNBCs ?

17. 61. Whether Nomination facility proposed to be extended to NBFCs, has been notified?

1. The framing of Rules for Nomination facility provided for in section 45QB of the Reserve Bank of India Act, 1934 are under consideration of the Government and when approved will be applicable to all non-banking institutions.