RBI Report on NBFC Norms

Last week, a committee formed by the Reserve Bank of India (RBI) issued its report recommending changes to the manner in which non-banking finance companies (NBFCs) are regulated in India. A number of changes have been suggested to the operational norms governing NBFCs. These include capital adequacy requirements, liquidity ratio, asset classification and provisioning and the like, which are expected to strengthen the existing regime regulating NBFCs.

Apart from the general requirements, two recommendations are noteworthy. The first provides that the benefits of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (SARFAESI Act) must be made available to NBFCs such that they are able to enforce their security interests utilising the favourable provisions of the Act. Currently, the benefit of the SARFAESI Act is available only to Indian banks and certain financial institutions. The second is that all NBFCs with assets of Rs. 1000 crores and above, whether listed or not, must comply with clause 49 of the listing agreement prescribed by SEBI for corporate governance and disclosure. This will bring even unlisted NBFCs on par with public listed companies in terms of corporate governance norms that will compel them to comply with requirements on board independence, audit committee, periodic financial disclosures, and the like. It is interesting to see an incorporation (by reference) of the SEBI corporate governance norms to the regime governing NBFCs (that includes unlisted ones as well).

Although the recommendations of the committee are far-reaching in nature, there is no clarity on whether and when they will be adopted and implemented. For instance, some of the changes will require amendment to legislation (e.g. SARFAESI Act and the RBI Act). However, the report represents and indication of the direction in which the regulatory regime governing NBFCs is likely to move in the near future.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • I don't understand why so many NBFCs ,e.g.Muthoot, Manappuram,Alchemy are raising money from public thro'fixed deposits/debentures/bonds,etc. without RBI & SEBI approval and in the process cheating public ! Why RBI/SEBI are keeping mum?Manappuram has gone one step further by claiming that RBI has allowed them to run like
    a Bank and collect money throughout the year.

  • Sub: Public Fund as per RBI Circular dated 01.09.2016
    Respected Sir,
    I have seen your article at https://indiacorplaw.in/2011/09/rbi-report-on-nbfc-norms.html
    very much knowledgable. If you can,

    You are requested to give guidelines/clarification/ interpretation on following points regarding Public Fund if you can guide:
    1. Will ‘loan from own shareholders taken by a private limited nbfc’ come under the definition of Public Fund as per RBI Circular dated 01.09.2016 vide chapter II point 3 (xxv), though deposit/loan from own shareholders is not regarded “Public Deposit” and there is no outside fund, loan belongs to shareholders of company themselves.

    2. Will ‘Overdraft against own Bank FDR taken by a private limited nbfc’ come under the definition of Public Fund/Bank finance as per RBI Circular dated 01.09.2016, whereas Bank FDR is not considered even as Financial Assets as per Rbi circular RBI/2011-12/446 DNBS (PD)CC.No.259 /03.02.59/2011-12 dated March 15, 2012 , since this Overdraft is only against NBFC’s own fund deposit as FDR to save interest, and there is no real Bank Finance, means anybody can take Overdraft against FDR without going through any process as in other bank Finance, where one has to be understood of having character of three C’s i.e. Capability, Capacity and Character. In another words, If there is no FDR, there will be no overdraft, means no real Bank Finance.

    In addition to this, even bond or debenture issued against any other asset is not regarded as Public Deposit, thus Overdraft against FDR should not be regarded as Bank Finance/Public Fund since there is no real Bank Finance or outside Public Fund. AS PER Master Direction – Non-Banking Financial Companies Acceptance of PublicDeposits (Reserve Bank) Directions, 2016. Dated August 25, 2016 under head of Definitions : 3. For the purpose of these Directions, unless the context otherwise requires:
    (xv) “public deposit” means a deposit as defined under section 45-I(bb) of the Reserve Bank of India Act, 1934 (2 of 1934), excluding the following:
    f) any amount raised by the issue of bonds or debentures secured by the mortgage of any immovable property of the company; or by any other asset or which would be compulsorily convertible into equity in the company provided that in the case of such bonds or debentures secured by the mortgage of any immovable property or secured by other assets, the amount of such bonds or debentures shall not exceed the market value of such immovable property/other assets;

    3. Will loan from ‘Holding private limited NBFC’ to its ‘associate private limited NBFC’ and vice versa or ‘loan within group entities to one another’ come under ‘inter corporate deposit’ under Public Fund as per RBI Circular dated 01.09.2016, since in real sense there is no outside Public Fund is involved. Even as per RBI at following sight https://www.rbi.org.in/scripts/FS_FAQs.aspx?Id=92&fn=14 under the head of
    All you wanted to know about NBFCs point 16. It is guided that
    Further, indirect receipt of public funds means funds received not directly but through associates and group entities which have access to public funds.
    From this it can be deduced that as far as Public funds is concerned, Holding, Associates and group entities are regarded one, thus loan within themselves can also not be regarded as inter corporate deposit as per RBI Circular dated 01.09.2016 under Public Fund as there is no outside sources/fund is involved.

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