RBI tightens NBFC norms; tougher rules for deposit-taking cos

In the wake of public investors increasingly being defrauded in the name of non-banking financial services, RBI today tightened its norms for NBFCs by requiring them to have a much stronger capital base, failing which they would lose their registration.
The NBFCs (Non Banking Financial Companies) would be subjected to a stronger set of rules and regulations if they raise public deposits, RBI said while announcing a new set of norms that also mandate a huge eight-fold increase in the minimum 'net owned fund' requirement from Rs 25 lakh to Rs 2 crore by 2017 in a phased manner.
The move comes at a time when thousands of companies, including various small entities and some large ones, have been under the scanner for illicit fund-raising activities across the country.

After the much-publicised Saradha scam came to fore in West Bengal last year, the government had forwarded to RBI a list of over 30,000 so-called NBFCs for further probe into their operations. It was found that a majority of these firms were not even authorised to carry out public-deposit business.
In India, total assets being managed by the financial sector is estimated at USD 2.8 trillion, out of which over USD 300 billion are with NBFCs.
With a view to streamline the regulations for the NBFC space, RBI said it would cancel the registration if the companies fail to adhere to norms, starting April 1, 2015 in a phased manner, as against the current practice of 'temporary suspension' of Certificate of Registration (CoR).

As per the latest directives, RBI has raised the limit for NBFCs to maintain the Net Owned Fund (NOF) requirement to to Rs 2 crore. At present, the NOF requirement is Rs 25 lakh. In a phased manner, the NBFCs would be required to raise it to Rs 1 crore by March 2016 and to further double it to Rs 2 crore by 2017.

"NBFCs failing to achieve the prescribed ceiling within the stipulated time period shall not be eligible to hold the CoR (Certificate of Registration) as NBFCs. The Bank will initiate the process for cancellation of CoR against such NBFCs," it said in a notification.

"Those accepting public funds will be subjected to limited prudential regulations but not conduct of business regulations if they have no customer interface...Where both public funds are accepted and customer interface exist, such companies will be subjected both to limited prudential regulations and conduct of business regulations," RBI said.
However, the norms would be relatively easier for the NBFCs which neither access public funds nor have a customer-facing business.
Further, NBFCs with assets of Rs 500 crore and above, irrespective of whether they have accessed public funds or not, would have to comply with a stronger set of rules including for fair conduct of business regulations and they would be considered systematically important.