Rbi Guidelines For NBFC

RBI GUIDELINES FOR NBFC
The role of Non-Banking Financial Companies (NBFCs) has

gained focused attention in recent years following the Report of the
Khan Working Group, the release of the RBI Discussion Paper on
Harmonisation of the Role and Operations of DFIs and Banks, and
the Report of the Working Group on Money Supply (Chairman:
Dr.Y.V.Reddy). The growing concerns about financial stability
point to the need for evolving safe and sound functioning of the
NBFCs which, in the
Indian context, are varied as they perform a wide range of tasks
The growth of NBFCs has been rapid, especially in the 1990s
owing to the high degree of their orientation towards customers
and simplification of sanction requirements. NBFCs have created a
large clientele base by offering relatively attractive rates of return
although in the process, some of them became unsustainable.
NBFCs have also displayed flexibility in meeting the credit needs
of specific sectors like equipment leasing, hire purchase, housing
finance and consumer finance, where gaps between the demand
and supply of funds have been high and where established
financial entities are not easily accessible to borrowers. As a result,
the distinction between banks and NBFCs is narrowing, both
offering almost the same spectrum of services; the only difference
being the exclusive privilege that commercial banks wield in
issuance of cheques.
To protect the interests of the depositors, deposit taking NBFCs

(NBFC-D) were subject to prudential regulation on various aspects
of their functioning. However, non-deposit taking NBFCs
(NBFCs-ND) were subject to minimal regulation. In the light of
the evolution and integration of the financial sector, it was felt that
all systemically relevant entities offering financial services ought
to be brought under a suitable regulatory framework to contain
systemic risk. Therefore, as a first step, it was advised vide
DNBS.PD/ CC. No. 86/ 03.02.089 /2006-07 dated December 12,
2006 that all NBFCs – ND with an asset size of Rs. 100 crore and
more as per the last audited balance sheet would be considered as
systemically important NBFC – ND (NBFC-ND-SI) and specific
regulatory framework involving prescription of capital adequacy
and exposure norms was put in place from April 01, 2007 for such
NBFCs-ND-SI.
1.Capital adequacy -: NBFCs – ND – SI were advised to

maintain a minimum Capital to Risk- Assets Ratio (CRAR) of 10%
with effect from April 01, 2007. However, in view of recent
international developments, the risks associated with highly
leveraged borrowings and reliance on short term funds by some
NBFCs to fund long gestation assets, concerns have arisen
regarding the enhanced systemic risk associated with the activities
of these entities. Keeping in view the importance of providing
adequate capital charge for the same in order to enhance the
cushion for any shocks, it has been decided to increase the
minimum capital to risk assets ratio (CRAR) for NBFCs-ND-SI
from the present prescription of 10%. They are advised to achieve
12% CRAR by March 31, 2009 and further 15% CRAR by March
31, 2010.
2.Disclosure in the Balance Sheet
In the light of the concerns as expressed above, the disclosure
norms in respect of NBFCs-ND-SI have been reviewed and it has
been decided that such Systemically Important NBFCs-ND shall
make additional disclosures in their Balance Sheet from the year
ending March 31, 2009 relating to:
i. Capital to Risk Assets Ratio (CRAR)

ii. Exposure to real estate sector, both direct and indirect; and
iii. Maturity pattern of assets and liabilities
6.Asset Liability Management (ALM) – Reporting

To address concerns regarding Asset Liability mismatches and
interest rate risk exposures, an ALM System was introduced for
the Non-Banking Financial Companies (NBFCs) as part of their
overall system for effective risk management in their various
portfolios vide Company Circular DNBS (PD).CC.No.15 /02.01 /
2000-2001 dated June 27, 2001. While it was stated therein that the
guidelines would be applicable to all NBFCs irrespective of
whether they are accepting / holding public deposits or not, to
begin with, NBFCs meeting the criteria of asset base of Rs.100
crore (whether accepting / holding public deposits or not) or
holding public deposits of Rs. 20 crore or more (irrespective of
their asset size) as per their audited balance sheet as of March 31,
2001 were required to put in place the ALM System. The
companies were advised that the guidelines should be fully
operationalised by the year ending March 31, 2002. A system of
half yearly reporting was also put in place for NBFCs holding
public deposits.
7. In view of the possibilities of leveraged investments, and asset
liability mismatches resulting from use of short term sources to
fund NBFC activities, it has now been decided to introduce a
system of reporting for NBFCs-ND-SI in the format as prescribed
in the Annex. The return will comprise of:
8. To enable the above class of NBFCs to fine tune their existing

MIS to meet the requirement of the reporting dispensation, such
compilation would commence with effect from the period ending
September 30, 2008. The periodicity of the Statement of short term
dynamic liquidity [NBS-ALM1] shall be monthly and that of
Statement of structural liquidity [NBS-ALM2] half-yearly. It shall
be submitted within 10 days of the close of the month to which it
relates and half yearly statement within 20 days of the close of the
half year to which it relates to the Regional Office of the
Department in whose jurisdiction the NBFC is registered.
However, to enable the NBFCs to fine tune the system, the first
return for the period ended September 2008 would be submitted by
the 1st week of January 2009.
The compilation frequency of Statement of Interest Rate
Sensitivity [NBS-ALM3] would be half yearly. As a first step, the
same shall be put up to the Board of Directors of the NBFC at half
yearly intervals. The statement shall be filed with the Bank later
from the date to be announced.

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RBI GUIDELINES FOR NBFC

The role of Non-Banking Financial Companies (NBFCs) has

To protect the interests of the depositors, deposit taking NBFCs

1.Capital adequacy -: NBFCs – ND – SI were advised to

i. Capital to Risk Assets Ratio (CRAR)

6.Asset Liability Management (ALM) – Reporting

8. To enable the above class of NBFCs to fine tune their existing

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