RBI /2004/ 94 IECD.No. 9 /08.12.01/2003-2004 March 11, 2004
Chief Executives of all Commercial Banks
Dear Sir,
Master Circular - Lending to Non-Banking Financial Companies (NBFCs)
Please refer to our Master circular No.2/08.12.01/2002-03 dated
July 1, 2002 on the captioned subject. The enclosed Master Circular consolidates
and updates all the instructions issued by the Department on the subject till
28th February 2004.
Yours faithfully,
(Smt. R. K. Makhija)
Chief General Manager
Encl. As above
Contents
1. General
2. Bank Finance to Registered
NBFCs
3. Bank Finance to NBFCs not
requiring registration
4. Bank Finance to Residuary Non-Banking
Companies (RNBCs)
5. Assesment of Working Capital
6. Activities
Not Eligible for Bank Credit
7. Prohibition on Bridge Loan/Interim
Finance
Appendix
Master Circular on Lending to NBFCs
1. GENERAL
1.1 Reserve Bank of India has been regulating
the financial activities of the Non-Banking Financial Companies under the
provisions of Chapter III B of the Reserve Bank of India Act, 1934.
1.2 With the amendment of the Reserve Bank of
India Act, 1934 in January 1997, in terms of Section 45 IA of the said Act,
all Non-Banking Financial Companies have to be mandatorily registered with
the Reserve Bank of India.
2. BANK FINANCE TO REGISTERED NBFCs
In the context of mandatory registration of NBFCs
with the Reserve Bank, as also consistent with the policy of bestowing greater
operational freedom to banks in the matter of credit dispensation, the ceiling
on bank credit linked to Net Owned Fund (NOF) of such companies has been withdrawn
in respect of all NBFCs which are statutorily registered with RBI and are
engaged in principal business of equipment leasing (EL), hire-purchase (HP),
loan and investment activities.
3. BANK FINANCE TO NBFCs NOT REQUIRING REGISTRATION
In respect of NBFCs which do not require to be registered
with RBI, [viz. i) Insurance Companies registered under Section 3 of the Insurance
Act, 1938; ii) Nidhi Companies notified under Section 620A of the Companies
Act, 1956; iii) Chit Fund Companies carrying on Chit Fund business as their
principal business as per Explanation to Clause (vii) of Section 45-I(bb)
of the Reserve Bank of India Act, 1934; iv) Stock Broking Companies/Merchant
Banking Companies registered under Section 12 of the Securities & Exchange
Board of India Act; and v) Housing Finance Companies being regulated by the
National Housing Bank (NHB) which have been exempted from the requirement
of registration by RBI], banks may take their credit decisions on the
basis of usual factors like the purpose of credit, nature and quality of underlying
assets, repayment capacity of borrowers as also risk perception, etc.
4. BANK FINANCE TO RESIDUARY NON-BANKING COMPANIES (RNBCs)
4.1 Residuary Non-Banking Companies (RNBCs) are
also required to be mandatorily registered with Reserve Bank of India. In
respect of such companies registered with RBI, bank finance would be restricted
to the extent of their Net Owned Fund (NOF).
4.2 Net Owned Fund (NOF)
4.2.1 Banks should follow the definition of
NOF as given in the explanation to Section 45-IA of the Reserve Bank of
India Act, 1934, i.e.,
I. Net Owned Fund means
(a) the aggregate of the paid-up equity capital
and free reserves as disclosed in the latest balance sheet of the company
after deducting therefrom
(i) accumulated balance of loss;
(ii) deferred revenue expenditure; and
(iii) other intangible assets; and
(b) further reduced by the amounts representing
(1) investment of such company in shares of
(i) its subsidiaries;
(ii) companies in the same group;
(iii) all other Non-Banking Financial Companies;
and
(2) the book value of debentures, bonds, outstanding
loans and advances (including hire purchase and lease finance) made
to, and deposits with
(i) subsidiaries of such company; and
(ii) companies in the same group, to the extent such amount exceeds
ten percent of (a) above
II "subsidiaries"
and "companies in the same group" shall have the same meanings assigned
to them in the Companies Act, 1956 (1of 1956)
5. ASSESSMENT OF WORKING CAPITAL
5.1
Banks may assess and provide need-based finance to NBFCs referred to above,
within the prudential guidelines and exposure norms prescribed by the Reserve
Bank subject to the condition that the activities indicated in paragraph 6
are not financed by them. Banks should lay down transparent policy and guidelines
for credit dispensation in respect of NBFCs with the approval of their Boards.
5.2
Banks should ensure that lending to Non-Banking Financial Companies (including
bill discounting / rediscounting) is part of the overall working capital credit
limit sanctioned to such companies after proper appraisal of their genuine
working capital needs.
5.3
In the light of the above, the instructions/guidelines issued in the past
by RBI regarding assessment of working capital credit needs of equipment leasing
and hire purchase finance companies, based on the concept of Maximum Permissible
Bank Finance (MPBF), have ceased to be mandatory.
6. Activities Not Eligible
for Bank Credit
6.1 The following activities undertaken
by NBFCs, are not eligible for bank credit:
(i) Bills discounted/rediscounted by NBFCs, except
for rediscounting of bills discounted by NBFCs arising from sale of -
- commercial vehicles (including light commercial
vehicles), and
- two wheeler and three wheeler vehicles, subject
to the following conditions:
- the bills should have been drawn by the
manufacturer on dealers only;
- the bills should represent genuine sale
transactions as may be ascertained from the chassis/engine number; and
- before rediscounting the bills, banks should
satisfy themselves about the bona fides and track record of
NBFCs which have discounted the bills.
(ii) Investments of NBFCs both of current and
long-term nature, in any company/entity by way of shares, debentures, etc.
However, Stock Broking Companies may be provided need-based credit against
shares and debentures held by them as stock-in-trade.
(iii) Unsecured loans/ inter-corporate deposits
by NBFCs to/in any company.
(iv) All types of loans and advances by NBFCs to
their subsidiaries, group companies/entities.
(v) Finance to NBFCs for further lending to individuals
for subscribing to Initial Public Offerings (IPOs)
(vi) Banks are precluded
from granting term loans for acquisition of existing assets (except imported
second hand machinery). Bank finance to leasing concerns should cover purchases
of only new equipment. Banks should not extend finance against existing assets
whether by way of term loans for purchase of such assets or by way of finance
to leasing companies for purchase and release of such assets
6.2 Leased and Sub-Leased Assets
- Banks should not enter into lease agreements
departmentally with equipment leasing companies as well as other Non-Banking
Financial Companies engaged in equipment leasing.
- As banks can only support lease rental receivables
arising out of lease of equipment/machinery owned by the borrowers, lease
rentals receivables arising out of sub-lease of an asset by a Non-Banking
Non Financial Company (undertaking nominal leasing activity) or by a Non-Banking
Financial Company should be excluded for the purpose of computation of bank
finance for such company
7. PROHIBITION ON BRIDGE LOANS/INTERIM FINANCE
7.1
Banks should not grant bridge loans of any nature, or interim finance against
capital/debenture issues and/or in the form of loans of a bridging nature
pending raising of long-term funds from the market by way of capital, deposits,
etc. to all categories of Non-Banking Financial Companies, i.e., equipment
leasing and hire-purchase finance companies, loan and investment companies
and also Residuary Non-Banking Companies (RNBCs).
7.2
Banks should strictly follow these instructions and ensure that these
are not circumvented in any manner whatsoever by purport and/or intent by
sanction of credit under a different nomenclature like unsecured negotiable
notes, floating rate interest bonds, etc., as also short-term loans, the repayment
of which is proposed/expected to be made out of funds to be or likely to be
mobilised from external/other sources and not out of the surplus generated
by the use of the asset(s).
Appendix
Master Circular
LENDING TO NON-BANKING FINANCIAL COMPANIES (NBFCs)
List of Circulars Consolidated in the Master Circular
|
No. |
Circular No. |
Date |
Subject |
Para No. |
|
1. |
IECD.No.29/08.12.01/98-99 |
25.05.99 |
Lending to Non-Banking Financial Companies (NBFCs) |
2, 3, 4.1, 5.1, 5.4.1 |
|
2. |
IECD.No.15/08.12.01/97-98 |
04.11.97 |
Guidelines for Lending by Banks - Assessment of Working Capital |
5.3 |
|
3. |
IECD.No.17/03.27.026/96-97 |
06.12.96 |
Bank Finance for Purchase/Lease of Existing Assets |
5.4.1(vi) |
|
4 |
DBOD.No.FSC.BC.101/24.01.001/95-96 |
20.09.95 |
Equipment Leasing, Hire Purchase and Factoring etc. Activities |
5.4.2 |
|
5. |
IECD.No.42/08.12.01/94-95 |
21.04.95 |
Lending to Non-Banking Financial Companies |
6.1, 6.2 |
|
6 |
DBOD.No.FSC.BC.71/C.469/91-92 |
22.01.92 |
Restriction on Credit to Certain Sectors |
5.2 |
|
7. |
IECD.No.14/08.12.01/94-95 |
28.09.94 |
Lending to Non-Banking Financial Companies |
6.1 |
List of Other Circulars containing Instructions/Guidelines/
Directives related to Non-Banking Financial Companies (NBFCs)
|
No. |
Circular No. |
Date |
Subject |
Para No. |
|
1. |
DBOD.No.Dir.BC.107/13.07.05/98-99 |
11.11.98 |
Rediscounting of Bills by Banks |
5.4.1 (i) (a) |
|
2. |
DBOD.No.Dir.BC.173/13.07.05/99-2000 |
12.05.2000 |
Rediscounting of Bills by Banks |
5.4.1 (i) (b) |
|
3. |
DBOD.No.Dir.BC.90/13.07.05/98 |
28.08.98 |
Bank Finance against Shares & Debentures |
5.4.1 (ii) |
|
4. |
DBOD.No.BP.BC.51/21.04.137/
2000-01 |
10.11.2000 |
Bank Financing of Equities and Investment in Shares |
5.4.1 (v) |
|