Governmment NBFCs to stand on equal footing
Anita Baid, Senior Manager (anita@vinodkothari.com)
Rajeev Jhawar, Executive (finserv@vinodkothari.com)
Section 2(45) of the Companies Act, 2013 defines a Government Company as –
“any company in which not less than fifty-one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company.”
A Government Company registered with the Reserve Bank of India (RBI) as a Non-Banking Finance Company (NBFC) is referred to as Government-owned NBFC or Government NBFC. As on March 2017, the count of Government NBFCs-NDSI was around 15 with an asset size of Rs.6280 billions and there were 2 deposit accepting NBFCs with an asset size of Rs.273 billion[1]. These Government NBFCs were earlier exempted from various regulatory and statutory provisions issued by the RBI for NBFCs.
In view of a regulatory regime for the financial sector, it has been a long drawn proposal of RBI to bring all deposit taking and systemically important government owned companies under the provisions of the same guidelines. Considering the same the RBI has eliminated regulatory exemptions for government-owned NBFCs vide its notification no. DNBR (PD) CC.No.092/03.10.001/2017-18 dated May 31, 2018[2]. The RBI has specified a roadmap, extending till 2021-22, for the Government NBFCs to meet the norms on capital adequacy, provisioning and corporate governance at par with the other NBFCs. The NBFC regulations shall be applicable to Government NBFCs as per the timeline indicated in the notification.
Previously, Government NBFCs were advised vide DNBS.PD/CC.No. 86/03.02.089/2006-07 dated December 12, 2006 to submit to the Reserve Bank [Department of Non-Banking Supervision – (DNBS)] a road map for compliance with the various elements of the NBFC regulations, in consultation with the Government. Hence, the current notification provides that Government NBFCs that are already complying with the prudential regulation as per the road map submitted by them shall continue to follow the same.
We have tried to list down the major provisions and the applicability on Government NBFCs post the withdrawal of exemption:
| Relevant provision | With exemption | Without exemption | ||||||||
| Reserve Bank of India Act, 1934 | ||||||||||
| Sections 45-IB
Maintenance of percentage of assets – 15% of the outstanding deposits |
Not required | Government NBFCs will be required to maintain a percentage of asset as investment in unencumbered approved securities as per the following timeline:
March 31, 2019 – 5% of outstanding deposits March 31, 2020 – 10% of outstanding deposits March 31, 2021 – 12% of outstanding deposits March 31, 2022 – 15% of outstanding deposits
|
||||||||
| Section 45-IC
Every non-banking financial company shall create a reserve fund and transfer therein a sum not less than twenty per cent of its net profit every year as disclosed in the profit and loss account and before any dividend is declared. |
Not required | By March 31, 2019, the Government NBFCs shall be required to transfer at least 20% of its net profit to the statutory reserve fund | ||||||||
| Master Direction – Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 | ||||||||||
| Income Recognition
The income recognition shall be based on recognized accounting principles. The income recognition shall be based on recognized accounting principles. Income including interest/ discount/ hire charges/ lease rentals or any other charges on NPA shall be recognized only when it is actually realized. Any such income recognized before the asset became non-performing and remaining unrealized shall be reversed. |
Not Required | Government NBFC-SI and deposit taking, will be required to recognize income in accordance with accounting principles for FY ending March 31, 2019. | ||||||||
| Asset Classification
An asset, in respect of which, interest has remained overdue for a period of 90 days or more shall be classified as NPA. |
Not Required | Government NBFC-SI and deposit taking shall classify an asset as a NPA if the interest has remained overdue for a period of
1. 120 days or more for the financial year ending March 31, 2019 2. 90 days or more for the financial year ending March 31, 2020 and thereafter.
|
||||||||
| Provisioning Requirement
Every applicable NBFC shall make provisions for · standard assets at 0.40 per cent by the end of March 2018 and thereafter of the outstanding, which shall not be reckoned for arriving at net NPAs. · loss asset: the entire asset shall be written off. · sub-standard assets: A general provision of 10 percent of total outstanding shall be made. · doubtful asset: 100% provision to the extent to which the advance is not covered by the realizable value of the security to which the applicable NBFC has a valid recourse shall be made. The realizable value is to be estimated on a realistic basis and also
|
Not Required | Government NBFC-SI and deposit taking, will be required to comply with the prescribed requirement in totality for the financial year ending March 31, 2019 and thereafter. | ||||||||
| Capital Adequacy
The NBFC shall maintain CRAR of 15 percent (with a minimum Tier I capital of 10 percent) |
Not Required | Government NBFC-SI and deposit taking will have to comply with capital adequacy ratio as mentioned in the table below:
|
||||||||
| Concentration of Credit Investment
No applicable NBFC shall, (i) lend to (a) any single borrower exceeding fifteen per cent of its owned fund; and (b) any single group of borrowers exceeding twenty-five per cent of its owned fund; (ii) invest in (a) the shares of another company exceeding fifteen per cent of its owned fund; and (b) the shares of a single group of companies exceeding twenty-five per cent of its owned fund; (iii) lend and invest (loans/investments taken together) exceeding (a) twenty five per cent of its owned fund to a single party; and (b) forty per cent of its owned fund to a single group of parties. |
Not Required | Government NBFCs, set up to serve specific sectors may approach the RBI for exemptions, if any.
For other NBFC-SI and deposit taking, the timeline for ensuring the compliance is FY March 31, 2022 |
||||||||
| Corporate Governance
All applicable NBFCs shall adhere to following requirements in order to ensure good corporate governance · Formation of various committees · Fit and proper criteria for directors · Disclosure and Transparency · Rotation of partners of the Statutory Auditors Audit Firm · Framing of Internal Guidelines |
Not required | Government NBFC-SI and deposit taking, are required to adhere to corporate governance guidelines for the financial year March 31, 2019 and thereafter. | ||||||||
| Conduct of Business Regulations (Fair Practices Code) | Not required | Government NBFC-SI and deposit taking, are required to adhere to fair practices code for the financial year March 31, 2019 and thereafter. | ||||||||
| Master Direction – Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 | ||||||||||
| Income Recognition
The income recognition shall be based on recognized accounting principles. Income including interest/ discount/ hire charges/ lease rentals or any other charges on NPA shall be recognized only when it is actually realized. Any such income recognized before the asset became non-performing and remaining unrealized shall be reversed. |
Not Required | Government NBFC-NSI will be required to recognize income in accordance with accounting principles dated March 31,2019 | ||||||||
| Asset Classification
An asset, in respect of which, interest has remained overdue for a period of 180 days or more shall be classified as NPA. |
Not Required | Government NBFC-NSI shall classify an asset as a NPA if the interest has remained overdue for a period of
1. 180 days or more for the financial year ending March 31, 2019 and thereafter.
|
||||||||
| Leverage Ratio
The leverage ratio of an applicable NBFC shall not be more than 7 at any point of time, with effect from March 31, 2015. |
Not Required | A roadmap for adherence by March 31, 2022 to be prepared by the Government NBFC-NSI. | ||||||||
| Master Direction – Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016 | ||||||||||
| Minimum Credit Rating
To get rated by approved Credit Rating Agencies |
Not Required | Government NBFC-D shall obtain Investment Grade Credit rating for acceptance of public deposits- March 31, 2019.
A Government NBFC-D having investment grade credit rating can accept deposits only up to 1.5 times of its NOF. Government NBFCs holding deposits in excess of the limit shall not access fresh deposits or renew existing ones till they conform to the limit, the existing deposits will be allowed to run off till maturity. |
||||||||
| Other Deposit Directions | Not required | All other directions shall apply from Balance Sheet dated March 31, 2019. | ||||||||
The removal of exemption benefits for Government NBFCs shall ensure that both types of NBFCs stand at par in terms of compliance with specific RBI regulations. This would also result in intensifying the competition between the two types of ownership structures.
[1] RBI Annual Publication- Trend and Progress of Banking in India
[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11283&Mode=0
Leave a Reply
Want to join the discussion?Feel free to contribute!