Master Direction - Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016

RESERVE BANK OF INDIA

DEPARTMENT OF REGULATION

CENTRAL OFFICE, 2nd FLOOR, MAIN OFFICE BUILDING

SHAHID BHAGAT SINGH MARG, FORT, MUMBAI – 400 001

RBI/DNBR/2016-17/45

Master Direction DNBR.PD.008/03.10.119/2016-17 September 01, 2016

(Updated as on June 14, 2022*)

(Updated as on May 02, 2022*)

(Updated as on April 22, 2022*)

(Updated as on April 01, 2022*)

(Updated as on March 03, 2022*)

(Updated as on February 17, 2020*)

(Updated as on November 22, 2019*)

(Updated as on August 02, 2019*)

(Updated as on May 16, 2019*)

(Updated as on April 16, 2019*)

(Updated as on February 22, 2019*)

(Updated as on May 31, 2018*)

(Updated as on February 23, 2018*)

(Updated as on November 09, 2017*)

(Updated as on July 06, 2017*)

(Updated as on March 09, 2017*)

(Updated as on March 02, 2017*)

(Updated as on February 02, 2017*)

(Updated as on October 17, 2016*)

Master Direction - Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016

The Reserve Bank of India (the Bank), having considered it necessary in the public interest, and being satisfied that, for the purpose of enabling the Bank to regulate the financial system to the advantage of the country and to prevent the affairs of any Systemically Important Non-Deposit taking Non-Banking Financial Company (NBFC-ND-SI) and Deposit taking Non-Banking Financial Company (NBFC-D) from being conducted in a manner detrimental to the interest of investors and depositors or in any manner prejudicial to the interest of such NBFCs, and in exercise of the powers conferred under sections 45JA, 45K, 45L and 45M of the Reserve Bank of India Act, 1934 (Act 2 of 1934) and section 3 read with section 31A and section 6 of the Factoring Regulation Act, 2011 (Act 12 of 2012), hereby issues to every NBFC-ND-SI and NBFC-D, in supersession of the Notification No.DNBS.192/DG(VL)-2007 dated February 22, 2007, Notification DNBS.PD.CC.No.168/03.02.089/2009-10 dated February 12, 2010, Notification No.DNBS.233/CGM(US)-2011 dated

November 21, 2011, Notification DNBS.PD.No.234/CGM(US)2011 dated December 02, 2011, Notification DNBS.PD.No.247/CGM(US)-2012 dated July 23, 2012 and Notification No.DNBR.009/CGM(CDS)-2015 dated March 27, 2015 the Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 (the Directions) hereinafter specified.

(J P Sharma)

Chief General Manager

Since this Master Direction has been significantly amended, it has been replaced rather than showing the changes in track mode for reader convenience. The changes are listed at the end of Master Direction in any case.

Index

Section I : Introduction

Chapter I – Preliminary

Chapter II – Definition

Chapter III – Registration

Section II : Prudential Issues

Chapter IV – Capital Requirements

Chapter V – Prudential Regulations

Chapter VI – Fair Practice Code

Chapter VII – Specific Directions to NBFC- Factors and NBFC-ICCs registered under the Factoring Regulation Act, 2011

Chapter VIII – Specific Directions to IDF-NBFCs

Chapter IX – Specific Directions to NBFC-MFIs and Microfinance Loans of Applicable NBFCs including NBFC-MFIs

Section III: Governance Issues

Chapter X – Acquisition/Transfer of Control

Chapter XI – Corporate Governance

Section IV : Miscellaneous Issues

Chapter XII - Opening of Branch/Subsidiary/Joint Venture/

Representative Office or Undertaking Investment Abroad by NBFCs

Chapter XIII – Miscellaneous Instructions

Chapter XIV – Reporting Requirements

Chapter XV – Interpretations

Chapter XVI – Repeal

Annex

Annex I – Timeline for Government NBFCs

Annex II - Guidelines on Liquidity Risk Management Framework

Annex III – Guidelines on Liquidity Coverage Ratio (LCR)

Annex III A - Reporting format for NBFCs declaring dividend Annex IV - Schedule to the Balance Sheet of a NBFC Annex V - Data on Pledged Securities

Annex VI - Guidelines for Licensing of New Banks in the Private Sector - Definitions

Annex VII - Projects under Implementation

Annex VIII - Deleted

Annex IX – Deleted

Annex X – Deleted

Annex XI - Self–Regulatory Organization (SRO) for NBFC-MFIs – Criteria for Recognition

Annex XII - Information about the proposed promoters/ directors/ shareholders of the company

Annex XIII - ‘Fit and Proper’ Criteria for directors of NBFCs

Annex XIV - Declaration and Undertaking by Director

Annex XV - Form of Deed of Covenants with a Director of an NBFC

Annex XVI - Indicative List of Balance Sheet Disclosure

Annex XVII - Terms and Conditions Applicable to Perpetual Debt Instruments (PDI) for being Eligible for Inclusion in Tier I capital

Annex XVIII - Guidelines for Entry of NBFCs into Insurance

Annex XIX - Guidelines on issue of Co-Branded Credit Cards

Annex XX - Guidelines on Distribution of Mutual Fund Products by NBFCs

Annex XXI - Guidelines for Credit Default Swaps - NBFCs as users

Annex XXII – Deleted

Annex XXIII - Guidelines on Private Placement of NCDs

Annex XXIV – Deleted

Annex XXV – Directions on Managing Risks and Code in Outsourcing of Financial Services by NBFCs

Annex XXVI - Regulatory Guidance on Implementation of Indian Accounting Standards by Non-Banking Financial Companies

Section – I

Introduction

Chapter – I

PRELIMINARY

Short Title and Commencement.

These Directions shall be called the Non-Banking Financial Company -

Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.

These directions shall come into force with immediate effect.

Applicability

(1) The provisions of these Directions shall apply to the following:

every Systemically Important Non-Deposit taking Non-Banking Financial Company (NBFC-ND-SI) registered with the Bank under the provisions of Reserve Bank of India Act, 1934 (RBI Act, 1934);

every Deposit taking Non-Banking Financial Company (NBFC-D) registered with the Bank under the provisions of RBI Act, 1934;

every Non-Banking Financial Company – Factor registered with the Bank under section 3 of the Factoring Regulation Act, 2011 and having an asset size of ₹500 crore and above and every Non-Banking Financial Company - Investment and Credit Company registered with the bank under Section 3 of the Factoring Regulation Act, 2011;

every Infrastructure Debt Fund – Non-Banking Finance Company (IDF-NBFC) registered with the Bank under the provisions of RBI Act, 1934;

every Non-Banking Finance Company – Micro Finance Institution (NBFC-MFI) registered with the Bank under the provisions of RBI Act, 1934 and having an asset size of ₹500 crore and above;

every Non-Banking Finance Company - Infrastructure Finance Company (NBFC-IFC) registered with the Bank under the provisions of RBI Act, 1934 and having an asset size of ₹500 crore and above.

The Category of NBFCs as mentioned at points (i) to (vi) above are hereafter referred to as ‘applicable NBFCs’, for the purpose of these Directions. Specific directions applicable to specific categories of NBFCs registered as NBFC-Factors and NBFC-ICCs registered under Factoring Regulation Act, 2011, IDF-NBFCs and NBFC-MFIs are as provided for under respective Chapters in these Directions.

These Directions shall apply to a non-banking financial company being a Government company as defined under clause (45) of Section 2 of the Companies Act, 2013 (Act 18 of 2013). The directions relating to prudential regulation, acceptance of public deposits, corporate governance, conduct of business regulations and statutory provisions etc., shall, however, be followed by the government companies as per the timeline provided in Annex I. Government NBFCs that are already complying with the prudential regulation as per the road map submitted by them shall continue to follow the same.1

These Directions consolidate the regulations as issued by Department of Regulation, Reserve Bank of India. However, any other Directions/ guidelines issued by any other Department of the Bank, as applicable to an applicable NBFC shall be adhered to by it.

Chapter II

Definitions

For the purpose of these Directions, unless the context otherwise requires:

"Act" means the Reserve Bank of India Act, 1934;

"Bank" means the Reserve Bank of India constituted under section 3of the Reserve Bank of India Act, 1934

“Break up value” means the equity capital and reserves as reduced by intangible assets and revaluation reserves, divided by the number of equity shares of the investee company;

1Government Companies 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 Supervision – (DoS)] a road map for compliance with the various elements of the NBFC regulations, in consultation with the Government.

“Carrying cost” means book value of the assets and interest accrued thereon but not received;

“Company” means a company registered under section 3 of the Companies Act, 1956 or a corresponding provision under Companies Act, 2013;

“Companies in the group”, shall mean an arrangement involving two or more entities related to each other through any of the following relationships: Subsidiary – parent (defined in terms of AS 21), Joint venture (defined in terms of AS 27), Associate (defined in terms of AS 23), Promoter-promotee (as provided in the SEBI (Acquisition of Shares and Takeover) Regulations, 1997) for listed companies, a related party (defined in terms of AS 18), Common brand name, and investment in equity shares of 20 per cent and above.

“Concessionaire” means a party which has entered into an agreement called ‘Concession Agreement’ with a Project Authority, for developing infrastructure.

“Conduct of business regulations” means the directions issued by the Bank from time to time on Fair Practices Code and Know Your Customer.

"Control" shall have the same meaning as is assigned to it under clause (e) of sub-regulation (1) of regulation 2 of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

“Current investment” means an investment which is by its nature readily realisable and is intended to be held for not more than one year from the date on

which such investment is made.

“Customer interface” means interaction between the NBFC and its customers while carrying on its business.

(xi)(a) “Dividend Payout Ratio” means the ratio between the amount of the dividend payable in a year and the net profit as per the audited financial statements for the financial year for which the dividend is proposed. Proposed dividend shall include both dividend on equity shares and compulsory convertible preference shares eligible for inclusion in Tier I Capital. In case the net profit for the relevant period includes any exceptional and/or extra-ordinary profits/ income or the financial statements are qualified (including ’emphasis of matter’) by the statutory auditor that indicates an overstatement of net profit, the same shall be reduced from net profits while determining the Dividend Payout Ratio.

“Earning value” means the value of an equity share computed by taking the average of profits after tax as reduced by the preference dividend and adjusted

for extra-ordinary and non-recurring items, for the immediately preceding three years and further divided by the number of equity shares of the investee company and capitalised at the following rate:

in case of predominantly manufacturing company, eight per cent;

in case of predominantly trading company, ten per cent; and

in case of any other company, including non-banking financial company, twelve per cent;

Note: If, an investee company is a loss-making company, the earning value will be taken at zero;

“Fair value” means the mean of the earning value and the breakup value.

“Hybrid debt” means capital instrument which possesses certain characteristics of equity as well as of debt.

“Infrastructure Debt Fund-Non-Banking Financial Company” or “IDF-NBFC” means a non-deposit taking NBFC that has Net Owned Fund of ₹300 crore or more and which invests only in Public Private Partnerships (PPP) and post commencement operations date (COD) infrastructure projects which have completed at least one year of satisfactory commercial operation and becomes a party to a Tripartite Agreement.

“Infrastructure Finance Company” means a non-deposit taking NBFC that fulfils the following criteria:

a minimum of 75 per cent of its total assets deployed in “infrastructure loans”;

Net owned funds of ₹300 crore or above;

minimum credit rating of 'A' issued by any of the SEBI-registered Credit Rating Agencies;

CRAR of 15 per cent (with a minimum Tier I capital of 10 per cent).

“Infrastructure lending” means a credit facility extended by non-banking financial company to a borrower, by way of term loan, project loan subscription to bonds/debentures/preference shares/equity shares in a project company acquired as a part of the project finance package such that subscription amount to be “in the nature of advance” or any other form of long term funded facility for exposure in the infrastructure sub-sectors as notified by the Department of Economic Affairs, Ministry of Finance, Government of India, from time to time2.

2Modified vide Circular No.DNBR.PD.CC.No.085/03.10.001/2016-17 dated March 02, 2017

“Non-Banking Financial Company-Investment and Credit Company (NBFC-ICC)" means any company which is a financial institution carrying on as its principal business- asset finance, the providing of finance whether by making loans or advances or otherwise for any activity other than its own and the acquisition of securities; and is not any other category of NBFC as defined by the Bank in any of its Master Directions.

"Non-Banking Financial Company-Factor (NBFC-Factor)" means a non-banking financial company as defined in clause (f) of section 45-I of the RBI Act, 1934, which has its principal business as defined in paragraph 42 of these directions and has been granted a certificate of registration under section 3 of the Factoring Regulation Act, 2011.

“Non-Banking Financial Company–Micro Finance Institution (NBFC-MFI)” means a non-deposit taking NBFC that fulfils the following conditions:

Minimum Net Owned Funds of ₹5 crore. (For NBFC-MFIs registered in the North Eastern Region of the country, the minimum NOF requirement shall stand at ₹2 crore);

Not less than 75 per cent of its total assets are in the nature of “microfinance loans” as defined under Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022.

“Non-Operative Financial Holding Company (NOFHC)” means a non-deposit taking NBFC referred to in the "Guidelines for Licensing of New Banks in the Private Sector", issued by the Bank, which holds the shares of a banking company and the shares of all other financial services companies in its group, whether regulated by Bank or by any other financial regulator, to the extent permissible under the applicable regulatory prescriptions.

“Long term investment” means an investment other than a current investment.

ᜀ Ā ᜀ 㴀 ЀȀ ̀⠀ ⤀Ā ЀȀ ̀⠀Ā⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ԁ Ā Ā Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ “Net asset value” means the latest declared net asset value by the mutual fund concerned in respect of that particular scheme.

ᜀ Ā ᜀ 㴀 ЀȀ ̀⠀ ⤀Ā ЀȀ ̀⠀Ā⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ԁ Ā Ā Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ “Net book value” means:

in the case of hire purchase asset, the aggregate of overdue and future instalments receivable as reduced by the balance of unmatured finance charges and further reduced by the provisions made as per paragraph 13(2) of these Directions;

in the case of leased asset, aggregate of capital portion of overdue lease

rentals accounted as receivable and depreciated book value of the lease asset as adjusted by the balance of lease adjustment account.

“Owned fund” means paid up equity capital, preference shares which are compulsorily convertible into equity, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset, as reduced by accumulated loss balance, book value of intangible assets and deferred revenue expenditure, if any.

“Project Authority” means an authority constituted by a statute for the development of infrastructure in the country.

“Public deposit” for the purpose of the Directions shall have the same meaning as defined in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions 2016.

“Public funds" includes funds raised either directly or indirectly through public deposits, inter-corporate deposits, bank finance and all funds received from outside sources such as funds raised by issue of Commercial Papers, debentures etc. but excludes funds raised by issue of instruments compulsorily convertible into equity shares within a period not exceeding 5 years from the date of issue.

"Subordinated debt" means an instrument, which is fully paid up, is unsecured and is subordinated to the claims of other creditors and is free from restrictive clauses and is not redeemable at the instance of the holder or without the consent of the supervisory authority of the non-banking financial company. The

book value of such instrument shall be subjected to discounting as provided

hereunder:

Remaining Maturity of the instruments Rate of discount

(a) Upto one year 100 per cent

(b) More than one year but upto two years 80 per cent

(d) More than three years but upto four years 40 per cent

(e) More than four years but upto five years 20 per cent

to the extent such discounted value does not exceed fifty per cent of Tier I capital.

“Substantial interest” means holding of a beneficial interest by an individual or his spouse or minor child, whether singly or taken together in the

shares of a company, the amount paid up on which exceeds ten per cent of the paid-up capital of the company; or the capital subscribed by all the partners of a partnership firm.

“Systemically important non-deposit taking non-banking financial company”, means a non-banking financial company not accepting/ holding public deposits and having total assets of ₹500 crore and above as shown in the last audited balance sheet.

“Tier I Capital” means owned fund as reduced by investment in shares of other non-banking financial companies and in shares, debentures, bonds, outstanding loans and advances including hire purchase and lease finance made to and deposits with subsidiaries and companies in the same group exceeding, in aggregate, ten per cent of the owned fund; and perpetual debt instruments issued by a non-deposit taking non-banking financial company in each year to the extent it does not exceed 15 per cent of the aggregate Tier I Capital of such company as on March 31 of the previous accounting year.

“Tier II capital” includes the following:

preference shares other than those which are compulsorily convertible into equity;

revaluation reserves at discounted rate of fifty five per cent;

General provisions (including that for Standard Assets) and loss reserves to the extent these are not attributable to actual diminution in value or identifiable potential loss in any specific asset and are available to meet unexpected losses, to the extent of one and one fourth percent of risk weighted assets;

hybrid debt capital instruments;

subordinated debt; and

perpetual debt instruments issued by a non-deposit taking non-banking financial company which is in excess of what qualifies for Tier I Capital, to the extent the aggregate does not exceed Tier I capital.

“Tripartite Agreement” means an agreement between three parties, namely, the concessionaire, the Project Authority and IDF-NBFC that also binds all the parties thereto to the terms and conditions of the other Agreements referred to

therein.

Words or expressions used but not defined herein and defined in the RBI Act shall have the same meaning as assigned to them in the RBI Act. Any other words or expressions not defined in the RBI Act shall have the same meaning as assigned to

them in the Factoring Regulation Act, 2011. Any words or expressions used and not defined in these directions or in the RBI Act, or the Factoring Regulation Act or any of the Directions issued by the Bank, shall have the meanings respectively assigned to them under the Companies Act, 1956 or Companies Act, 2013 (Act 18 of 2013) as the case may be.

Chapter III

Registration

In exercise of the powers conferred under clause (b) of sub-section (1) of section 45–IA of the Reserve Bank of India Act, 1934 (Act 2 of 1934) and all the powers enabling it in that behalf, the Bank, hereby specifies two hundred lakh rupees as the net owned fund (NOF) required for a non-banking financial company to commence or carry on the business of non-banking financial institution, except wherever otherwise a specific requirement as to NOF is prescribed by the Bank.

Provided that a non-banking financial company holding a Certificate of Registration (CoR) issued by the Bank and having net owned fund of less than two hundred lakh of rupees, may continue to carry on the business of non-banking financial institution, if such company achieves net owned fund of two hundred lakh of rupees before April 1, 2017.

It will be incumbent upon such NBFCs, the NOF of which currently falls below ₹200 lakh, to submit a statutory auditor's certificate certifying compliance with the prescribed levels by the end of the period as given above.

NBFCs failing to achieve the prescribed level within the stipulated period shall not be eligible to hold the CoR as NBFCs.

5A. Investment in applicable NBFCs from FATF non-compliant jurisdictions

( ) Investments in applicable NBFCs from FATF non-compliant jurisdictions shall not

be treated at par with those from the compliant3 jurisdictions. In terms of directions issued vide circular DOR.CO.LIC.CC No.119/03.10.001/2020-21 dated February 12, 2021, new investors from or through non-compliant FATF jurisdictions, whether in existing NBFCs or in companies seeking Certification of Registration (COR), should

The Financial Action Task Force (FATF) periodically identifies jurisdictions with weak measures to combat money laundering and terrorist financing (AML/CFT) in its following publications: i) High-Risk Jurisdictions subject to a Call for Action, and ii) Jurisdictions under Increased Monitoring. A jurisdiction, whose name does not appear in the two aforementioned lists, shall be referred to as a FATF compliant jurisdiction.

not be allowed to directly or indirectly acquire ‘significant influence’ in the investee, as defined in the applicable accounting standards. In other words, fresh investors (directly or indirectly) from such jurisdictions in aggregate should be less than the threshold of 20 per cent of the voting power (including potential voting power4) of the NBFC.

Investors in existing NBFCs holding their investments prior to the classification of the source or intermediate jurisdiction/s as FATF non-compliant, may continue with the investments or bring in additional investments as per extant regulations so as to support continuity of business in India.

Section –II

Prudential Issues

Chapter - IV

Capital Requirements

(1) Every applicable NBFC shall maintain a minimum capital ratio consisting of Tier I and Tier II capital which shall not be less than 15 per cent of its aggregate risk weighted assets on-balance sheet and of risk adjusted value of off-balance sheet items.

(2) The Tier I capital in respect of applicable NBFCs (other than NBFC-MFI and IDF-NBFC), at any point of time, shall not be less than 10 per cent.

(3) Applicable NBFCs primarily engaged in lending against gold jewellery (such loans comprising 50 per cent or more of their financial assets) shall maintain a minimum Tier l capital of 12 per cent.

Explanations:

I. On balance sheet assets–

(1) In these Directions, degrees of credit risk expressed as percentage weightages have been assigned to balance sheet assets. Hence, the value of each asset / item requires to be multiplied by the relevant risk weights to arrive at risk adjusted value of assets. The aggregate shall be taken into account for reckoning the minimum

Potential voting power could arise from instruments that are convertible into equity, other instruments with contingent voting rights, contractual arrangements, etc. that grant investors voting rights (including contingent voting rights) in the future. In such cases, it should be ensured that new investments from FATF non-compliant jurisdictions are less than both (i) 20 per cent of the existing voting powers and (ii) 20 per cent of existing and potential voting powers assuming those potential voting rights have materialised.

capital ratio. The risk weighted asset shall be calculated as the weighted aggregate of funded items as detailed hereunder:

Weighted risk assets - On-Balance Sheet items Percentage weight

(i) Cash and bank balances including 0

fixed deposits and certificates of deposits

with banks

(ii) Investments

(a) Approved securities [Except at (c) 0

below]

(b) Bonds of public sector banks 20

deposits/bonds ofpublicfinancial

institutions

(d) Shares of all companies and

debentures / bonds/commercial 100

papers of all companies and units of

all mutual funds

(e) All assets covering PPP and post 50

commercialoperationsdate (COD)

infrastructureprojectsinexistence

over a year of commercial operation.

(iii) Current assets

(a) Stock on hire (net book value) 100

(b) Inter-corporate loans/deposits 100

against deposits held

(d) Loans to staff 0

(e) Other secured loans and advances 100

considered good [Except at (vi) below]

(f) Bills purchased/ discounted 100

(g) Others (To be specified) 100

(iv) Fixed Assets (net of depreciation)

(a) Assets leased out (net book value) 100

(b) Premises 100

(v) Other assets

(a) Income tax deducted at source 0

(net of provision)

(b) Advance tax paid (net of provision) 0

securities

(d) Others (to be specified) 100

(vi) Domestic Sovereign

(a) fund-based claims on the Central Government 0

(b) Direct loan/ credit/ overdraft exposure

and investment in State Government securities 0

(d) State Government guaranteed claims,

which have not remained in default/ which

are in default for a period not more than 90 days 20

(e) State Government guaranteed claims,

which have remained in default for a period of more

than 90 days 100

Notes:

Netting shall be done only in respect of assets where provisions for depreciation or for bad and doubtful debts have been made.

Assets which have been deducted from owned fund to arrive at net owned fund shall have a weightage of ‘zero’.

While calculating the aggregate of funded exposure of a borrower for the purpose of assignment of risk weight, such non-banking financial companies shall net off the amount of cash margin/caution money/security deposits (against which right to set-

off is available) held as collateral against the advances out of the total outstanding exposure of the borrower.

Off-balance sheet items

(1) General

Applicable NBFC shall calculate the total risk weighted off-balance sheet credit exposure as the sum of the risk-weighted amount of the market related and non-market related off-balance sheet items. The risk-weighted amount of an off-balance sheet item that gives rise to credit exposure shall be calculated by means of a two-step process:

the notional amount of the transaction shall be converted into a credit equivalent amount, by multiplying the amount by the specified credit conversion factor or by applying the current exposure method; and

the resulting credit equivalent amount shall be multiplied by the risk weight applicable viz., zero per cent for exposure to Central Government/ State Governments, 20 per cent for exposure to banks and 100 per cent for others.

(2) Non-market-related off- balance sheet items

The credit equivalent amount in relation to a non-market related off-balance sheet item shall be determined by multiplying the contracted amount of that particular transaction by the relevant credit conversion factor (CCF).

Sr. No. Instruments Credit Conversion

Factor

i. Financial & other guarantees 100

ii. Share/debenture underwriting obligations 50

iii. Partly-paid shares/debentures 100

iv. Bills discounted/rediscounted 100

v. Lease contracts entered into but yet to be 100

executed

vi. Sale and repurchase agreement and asset 100

sales with recourse, where the credit risk

remains with the applicable NBFC.

vii. Forward asset purchases, forward deposits 100

and partly paid shares and securities,

which represent commitments with certain

draw down.

viii.Lending of NBFC securities or posting of100

securities as collateral by the applicable

NBFC, including instances where these

arise out of repo style transactions

ix.Other commitments (e.g., formal standby20

facilities and credit lines) with an original50

maturity of up to one year over one year

x.Similarcommitmentsthatare0

unconditionally cancellable at any time by

the applicable NBFC without prior notice or

that effectively provide for automatic

cancellation due to deterioration in a

borrower’s credit worthiness

xi.Take-out Finance in the books of taking-overinstitution

(i) Unconditional take-out finance

100

(ii) Conditional take-out finance

Note:Asthe counter-

partyexposurewill

determinetherisk

weight, it will be 100 per

cent in respect of all

borrowersorzero

percent ifcoveredby

Government guarantee.

xii.Commitment to provide liquidity facility for100

securitizationofstandardasset

transactions

xiii.Second loss credit enhancement for100

securitizationofstandardasset

transactions provided by third party

xiv. Other contingent liabilities (To be specified) 50

Note:

Cash margins/deposits shall be deducted before applying the conversion factor

Where the non-market related off-balance sheet item is an undrawn or partially undrawn fund-based facility, the amount of undrawn commitment to be included in calculating the off-balance sheet non-market related credit exposures is the maximum unused portion of the commitment that could be drawn during the remaining period to maturity. Any drawn portion of a commitment forms a part of applicable NBFCs on-balance sheet credit exposure.

For example:

A term loan of ₹700 crore is sanctioned for a large project which can be drawn down in stages over a three-year period. The terms of sanction allow draw down in three stages – ₹150 crore in Stage I, ₹200 crore in Stage II and ₹350 crore in Stage III, where the borrower needs the applicable NBFCs explicit approval for draw down under Stages II and III after completion of certain formalities. If the borrower has drawn already ₹50 crore under Stage I, then the undrawn portion would be computed with reference to Stage I alone i.e., it will be ₹100 crore. If Stage I is scheduled to be completed within one year, the CCF will be 20 per cent and if it is more than one year then the applicable CCF will be 50 per cent.

Market Related Off-Balance Sheet Items

Applicable NBFCs shall take into account all market related off-balance sheet items (OTC derivatives and Securities Financing Transactions such as repo/ reverse repo/CBLO etc.) while calculating the risk weighted off-balance sheet credit exposures.

The credit risk on market related off-balance sheet items is the cost to an applicable NBFC of replacing the cash flow specified by the contract in the event of counterparty default. This shall depend, among other things, upon

the maturity of the contract and on the volatility of rates underlying the type of instrument.

Market related off-balance sheet items shall include:

interest rate contracts - including single currency interest rate swaps, basis swaps, forward rate agreements, and interest rate futures;

foreign exchange contracts, including contracts involving gold, includes cross currency swaps (including cross currency interest rate swaps), forward foreign exchange contracts, currency futures, currency options;

Credit Default Swaps; and

any other market related contracts specifically allowed by the Bank which give rise to credit risk.

ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā Ȁ ̀⠀ ⤀Ā ȀȀ ̀⠀Ā⤀Ā ȀȀ ̀⠀Ȁ⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Exemption from capital requirements is permitted for -

foreign exchange (except gold) contracts which have an original maturity of 14 calendar days or less; and

instruments traded on futures and options exchanges which are subject to daily mark-to-market and margin payments.

ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā Ȁ ̀⠀ ⤀Ā ȀȀ ̀⠀Ā⤀Ā ȀȀ ̀⠀Ȁ⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ The exposures to Central Counter Parties (CCPs), on account of derivatives trading and securities financing transactions (e.g. Collateralized Borrowing and Lending Obligations - CBLOs, Repos) outstanding against them shall be assigned zero exposure value for counterparty credit risk, as it is presumed that the CCPs' exposures to their counterparties are fully collateralized on a daily basis, thereby providing protection for the CCP's credit risk exposures.

ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā Ȁ ̀⠀ ⤀Ā ȀȀ ̀⠀Ā⤀Ā ȀȀ ̀⠀Ȁ⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ A CCF of 100 per cent shall be applied to the corporate securities posted as collaterals with CCPs and the resultant off-balance sheet exposure shall be assigned risk weights appropriate to the nature of the CCPs. In the case of Clearing Corporation of India Limited (CCIL), the risk weight shall be 20 per cent and for other CCPs, risk weight shall be 50 per cent.

ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā Ȁ ̀⠀ ⤀Ā ȀȀ ̀⠀Ā⤀Ā ȀȀ ̀⠀Ȁ⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ The total credit exposure to a counter party in respect of derivative transactions shall be calculated according to the current exposure method as explained below.

Current Exposure Method (used for measuring capital charge for default risk)

The credit equivalent amount of a market related off-balance sheet transaction calculated using the current exposure method is the sum of (i) current exposure and (ii) potential future exposure of the contract.

Current exposure is defined as the sum of the gross positive mark-to-market value of all contracts with respect to a single counterparty (positive and negative marked-to-market values of various contracts with the same counterparty shall not be netted). The Current Exposure Method requires periodical calculation of the current exposure by marking these contracts to market.

Note: In case of bilateral netting arrangement, refer to the definition as specified in clause (iv) below.

Potential future exposure is determined by multiplying the notional principal amount of each of these contracts, irrespective of whether the contract has a zero, positive or negative mark-to-market value by the relevant add-on factor indicated below according to the nature and residual maturity of the instrument.

Credit Conversion Factors for interest rate related, exchange rate related and gold related derivatives Credit Conversion Factors (per cent)

Interest RateExchange Rate

ContractsContracts & Gold

One year or less 0.50 2.00

Over one year to five years 1.00 10.00

Over five years 3.00 15.00

For contracts with multiple exchanges of principal, the add-on factors are to be multiplied by the number of remaining payments in the contract.

For contracts that are structured to settle outstanding exposure following specified payment dates and where the terms are reset such that the market value of the contract is zero on these specified dates, the residual maturity shall be set equal to the time until the next reset date. However, in the case of interest rate contracts which have residual

maturities of more than one year and meet the above criteria, the CCF or add-on factor is subject to a floor of 1.0 per cent.

c. No potential future exposure shall be calculated for single currency floating/ floating interest rate swaps; the credit exposure on these contracts would be evaluated solely on the basis of their mark-to-market value.

d. Potential future exposures shall be based on 'effective' rather than 'apparent notional amounts'. In the event that the 'stated notional amount' is leveraged or enhanced by the structure of the transaction, the 'effective notional amount' must be used for determining potential future exposure. For example, a stated notional amount of USD 1 million with payments based on an internal rate of two times the lending rate of the applicable NBFC would have an effective notional amount of USD 2 million.

When effective bilateral netting contract as specified in ‘Explanations II’(4)(v) of Chapter IV is in place, current exposure i.e. replacement cost will be the net replacement cost; and the potential future exposure i.e. add-on will be ANet as calculated below:

Credit exposure on bilaterally netted forward transactions will be calculated as the sum of the net mark-to-market replacement cost, if positive, plus an add-on based on the notional underlying principal.

The add-on for netted transactions (ANet) will equal the weighted average of the gross add-on (AGross) and the gross add-on adjusted by the ratio of net current replacement cost to gross current replacement cost (NGR). This is expressed through the following formula:

ANet = 0.4 * AGross + 0.6 * NGR * AGross where:

NGR = level of net replacement cost/level of gross replacement cost for transactions subject to legally enforceable netting

agreements5

AGross = sum of individual add-on amounts (calculated by multiplying the notional principal amount by the appropriate add-on factors set out in the table in ‘Explanations II’(4)(ii) of Chapter

̀⠀ ⤀Ā ЀȀ ̀⠀Ā⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ ᔀ Ā Ȁ ⸀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Applicable NBFCs must calculate NGR on a counterparty by counterparty basis for all transactions that are subject to legally enforceable netting agreements.

IV) of all transactions subject to legally enforceable netting agreements with one counterparty.

For the purposes of calculating potential future exposure to a netting counterparty for forward foreign exchange contracts and other similar contracts in which the notional principal amount is equivalent to cash flows, the notional principal is defined as the net receipts falling due on each value date in each currency. The reason for this is that offsetting contracts in the same currency maturing on the same date will have lower potential future exposure as well as lower current exposure.

Definitions and general terminology

Current Exposure is the larger of zero, or the market value of a transaction or portfolio of transactions within a netting set with a counterparty that would be lost upon the default of the counterparty, assuming no recovery on the value of those transactions in bankruptcy. Current exposure is often also called Replacement Cost (RC).

Netting Set is a group of transactions with a single counterparty that are subject to a legally enforceable bilateral netting arrangement and for which netting is recognised for regulatory capital purposes. Each transaction that is not subject to a legally enforceable bilateral netting arrangement that is recognised for regulatory capital purposes should be interpreted as its own netting set for the purpose of these rules.

Requirement for recognition of Bilateral Netting Contract:

Applicable NBFCs may net transactions subject to novation under which any obligation between such NBFC and its counterparty to deliver a given currency on a given value date is automatically amalgamated with all other obligations for the same currency and value date, legally substituting one single amount for the previous gross obligations.

Applicable NBFCs may also net transactions subject to any legally valid form of bilateral netting not covered in (a), including other forms of novation.

In both cases (a) and (b), applicable NBFCs will need to satisfy that it has:

A netting contract or agreement with the counterparty which creates a single legal obligation, covering all included transactions, such that the applicable NBFCs would have either a claim to receive or obligation to

pay only the net sum of the positive and negative mark-to-market values of included individual transactions in the event a counterparty fails to perform due to any of the following: default, bankruptcy, liquidation or similar circumstances;

Written and reasoned legal opinions that, in the event of a legal challenge, the relevant courts and administrative authorities would find such NBFC’s exposure to be such a net amount under:

The law of the jurisdiction in which the counterparty is chartered and, if the foreign branch of a counterparty is involved, then also under the law of the jurisdiction in which the branch is located;

The law that governs the individual transactions; and

The law that governs any contract or agreement necessary to effect the netting.

Procedures in place to ensure that the legal characteristics of netting arrangements are kept under review in the light of possible changes in relevant law.

Contracts containing walkaway clauses will not be eligible for netting for the purpose of calculating capital requirements under these guidelines. A walkaway clause is a provision which permits a non-defaulting counterparty to make only limited payments or no payment at all, to the estate of a defaulter, even if the defaulter is a net creditor.

(5) Credit conversion factors for Credit Default Swaps (CDS):

Applicable NBFCs are only permitted to buy credit protection to hedge their credit risk on corporate bonds they hold. The bonds shall be held in current category or permanent category. The capital charge for these exposures shall be as under:

̀⠀ ⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ȁ ЀȀ ̀⠀ ⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ For corporate bonds held in current category and hedged by CDS where there is no mismatch between the CDS and the hedged bond, the credit protection shall be permitted to be recognised to a maximum of 80 per cent of the exposure hedged. Therefore, the applicable NBFC shall continue to maintain capital charge for the corporate bond to the extent of 20 per cent of the applicable capital charge. This can be achieved by taking the exposure value at 20 per cent of the market value of the bond and then multiplying that with the risk weight of the issuing entity. In addition to this, the bought CDS position shall attract a capital charge for counterparty risk which shall be calculated by applying a credit conversion factor of 100 per cent and a risk

weight as applicable to the protection seller i.e., 20 per cent for banks and 100 per cent for others.

For corporate bonds held in permanent category and hedged by CDS where there is no mismatch between the CDS and the hedged bond, Applicable NBFCs can recognise full credit protection for the underlying asset and no capital shall be required to be maintained thereon. The exposure shall stand fully substituted by the exposure to the protection seller and attract risk weight as applicable to the protection seller i.e., 20 per cent for banks and 100 per cent for others.

Chapter – V

Prudential Regulations

7. Income recognition

The income recognition shall be based on recognised accounting principles.

Income including interest/ discount/ hire charges/ lease rentals or any other charges on NPA shall be recognised only when it is actually realised. Any such income recognised before the asset became non-performing and remaining unrealised shall be reversed.

8. Income from investments

Income from dividend on shares of corporate bodies and units of mutual funds shall be taken into account on cash basis:

Provided that the income from dividend on shares of corporate bodies shall be taken into account on accrual basis when such dividend has been declared by the corporate body in its annual general meeting and the applicable NBFCs right to receive payment is established.

Income from bonds and debentures of corporate bodies and from Government securities/bonds shall be taken into account on accrual basis:

Provided that the interest rate on these instruments is pre-determined and interest is serviced regularly and is not in arrears.

Income on securities of corporate bodies or public sector undertakings, the payment of interest and repayment of principal of which have been guaranteed by Central Government or a State Government shall be taken into account on accrual basis.

9. Accounting standards

NBFCs that are required to implement Indian Accounting Standards (Ind AS) as per the Companies (Indian Accounting Standards) Rules, 2015 shall prepare their financial statements in accordance with Ind AS notified by the Government of India and shall comply with the regulatory guidance specified in Annex XXVI of these Directions. Disclosure requirements for notes to accounts specified in these directions shall continue to apply. Other NBFCs shall comply with the requirements of notified Accounting Standards (AS) insofar as they are not inconsistent with any of these directions.

10. Accounting of investments

(i) The Board of Directors of every applicable NBFC shall frame investment policy for the company and shall implement the same;

The criteria to classify the investments into current and long-term investments shall be spelt out by the Board of the company in the investment policy;

Investments in securities shall be classified into current and long term, at the time of making each investment;

In case of inter-class transfer –

there shall be no such transfer on ad-hoc basis;

(b) such transfer, if warranted, shall be effected only at the beginning of each half year, on April 1 or October 1, with the approval of the Board;

the investments shall be transferred scrip-wise, from current to long-term or vice-versa, at book value or market value, whichever is lower;

the depreciation, if any, in each scrip shall be fully provided for and appreciation, if any, shall be ignored;

the depreciation in one scrip shall not be set off against appreciation in another scrip, at the time of such inter-class transfer, even in respect of the scrips of the same category.

̀⠀ ⤀Ā ЀȀ ̀⠀Ā⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ȀĀ Ā ܀ ЀȀ ̀⠀Ā⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ (i) Quoted current investments shall, for the purposes of valuation, be grouped into the following categories, viz.,

equity shares,

preference shares,

debentures and bonds,

Government securities including treasury bills,

units of mutual fund, and

others.

Quoted current investments for each category shall be valued at cost or market value whichever is lower. For this purpose, the investments in each category shall be considered scrip-wise and the cost and market value aggregated for all investments in each category. If the aggregate market value for the category is less than the aggregate cost for that category, the net depreciation shall be provided for or charged to the profit and loss account. If the aggregate market value for the category exceeds the aggregate cost for the category, the net appreciation shall be ignored. Depreciation in one category of investments shall not be set off against appreciation in another category.

Unquoted equity shares in the nature of current investments shall be valued at cost or breakup value, whichever is lower. However, applicable NBFCs shall substitute fair value for the breakup value of the shares, if considered necessary. Where the balance sheet of the investee company is not available for two years, such shares shall be valued at one Rupee only.

Unquoted preference shares in the nature of current investments shall be valued at cost or face value, whichever is lower.

Investments in unquoted Government securities or Government guaranteed bonds shall be valued at carrying cost.

Unquoted investments in the units of mutual funds in the nature of current investments shall be valued at the net asset value declared by the mutual fund in respect of each particular scheme.

Commercial papers shall be valued at carrying cost.

A long-term investment shall be valued in accordance with the Accounting Standard issued by ICAI.

Note: Unquoted debentures shall be treated as term loans or other type of credit facilities depending upon the tenure of such debentures for the purpose of income recognition and asset classification.

11. Need for policy on demand/ call loans

The Board of Directors of every applicable NBFC granting/ intending to grant demand/call loans shall frame a policy for the company and implement the same.

Such policy shall, inter alia, stipulate the following:

̀⠀ ⤀Ā ЀĀ ĀĀĀ ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ 㜀 Ā Ȁ ⸀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ A cut-off date within which the repayment of demand or call loan shall be demanded or called up;

̀⠀ ⤀Ā ЀĀ ĀĀĀ ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ 㜀 Ā Ȁ ⸀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ The sanctioning authority shall, record specific reasons in writing at the time of sanctioning demand or call loan, if the cut-off date for demanding or calling up such loan is stipulated beyond a period of one year from the date of sanction;

̀⠀ ⤀Ā ЀĀ ĀĀĀ ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ 㜀 Ā Ȁ ⸀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ The rate of interest which shall be payable on such loans;

̀⠀ ⤀Ā ЀĀ ĀĀĀ ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ 㜀 Ā Ȁ ⸀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Interest on such loans, as stipulated shall be payable either at monthly or quarterly rests;

̀⠀ ⤀Ā ЀĀ ĀĀĀ ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ 㜀 Ā Ȁ ⸀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ The sanctioning authority shall, record specific reasons in writing at the time of sanctioning demand or call loan, if no interest is stipulated or a moratorium is granted for any period;

̀⠀ ⤀Ā ЀĀ ĀĀĀ ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ 㜀 Ā Ȁ ⸀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ A cut-off date, for review of performance of the loan, not exceeding six months commencing from the date of sanction;

̀⠀ ⤀Ā ЀĀ ĀĀĀ ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ 㜀 Ā Ȁ ⸀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Such demand or call loans shall not be renewed unless the periodical review has shown satisfactory compliance with the terms of sanction.

12. Asset classification

The asset classification norms as given below shall apply to every applicable NBFC (except NBFC-MFIs):

Every NBFC shall, after taking into account the degree of well-defined credit weaknesses and extent of dependence on collateral security for realisation, classify its lease/hire purchase assets, loans and advances and any other forms of credit into the following classes, namely:

Standard assets;

Sub-standard assets;

Doubtful assets; and

Loss assets.

The class of assets referred to above shall not be upgraded merely as a result of rescheduling, unless it satisfies the conditions required for the upgradation.

(i) Standard asset shall mean the asset in respect of which, no default in repayment of principal or payment of interest is perceived and which does not disclose any problem or carry more than normal risk attached to the business;

“sub-standard asset” shall mean:

an asset which has been classified as non-performing asset for a period not exceeding 12 months.

an asset where the terms of the agreement regarding interest and/ or principal have been renegotiated or rescheduled or restructured after commencement of operations, until the expiry of one year of satisfactory

performance under the renegotiated or rescheduled or restructured terms: Provided that the classification of infrastructure loan as a sub-standard asset shall be in accordance with the provisions of paragraph 25 of these Directions.

Doubtful asset shall mean:

a term loan, or

a lease asset, or

a hire purchase asset, or

any other asset,

which remains a sub-standard asset for a period exceeding 12 months.

loss asset shall mean:

an asset which has been identified as loss asset by the applicable NBFC or its internal or external auditor or by the Bank during the inspection of the applicable NBFC, to the extent it is not written off by the applicable NBFC; and

an asset which is adversely affected by a potential threat of non-recoverability due to either erosion in the value of security or non-availability of security or due to any fraudulent act or omission on the part of the borrower

(v) Non-Performing Asset (referred to in these Directions as “NPA”) shall mean:

an asset, in respect of which, interest has remained overdue for a period of three months or more;

a term loan inclusive of unpaid interest, when the instalment is overdue for a period of three months or more or on which interest amount remained overdue for a period of three months or more;

a demand or call loan, which remained overdue for a period of three months or more from the date of demand or call or on which interest amount remained overdue for a period of three months or more;

a bill which remains overdue for a period of three months or more;

the interest in respect of a debt or the income on receivables under the head ‘other current assets’ in the nature of short term loans/ advances, which facility remained overdue for a period of three months or more;

any dues on account of sale of assets or services rendered or reimbursement of expenses incurred, which remained overdue for a period of three months or more;

the lease rental and hire purchase instalment, which has become overdue for a period of three months or more;

in respect of loans, advances and other credit facilities (including bills purchased and discounted), the balance outstanding under the credit facilities (including accrued interest) made available to the same borrower/ beneficiary when any of the above credit facilities becomes non-performing asset:

Provided that in the case of lease and hire purchase transactions, an applicable NBFC shall classify each such account on the basis of its record of recovery.

13. Provisioning requirements

The provisioning requirements as given below shall apply to every applicable NBFC (except NBFC-MFIs):

Every applicable NBFC shall, after taking into account the time lag between an account becoming non-performing, its recognition as such, the realisation of the security and the erosion over time in the value of security charged, make provision against sub-standard assets, doubtful assets and loss assets as provided hereunder:-

Loans, advances and other credit facilities including bills purchased and discounted-

The provisioning requirement in respect of loans, advances and other credit facilities including bills purchased and discounted shall be as under:

(i) Loss Assets The entire asset shall be written off.

If the assets are permitted to remain in the

books for any reason, 100 per cent of the

outstanding shall be provided for;

(ii) Doubtful Assets (a) 100 per cent provision to the extent to

which the advance is not covered by the

realisable value of the security to which the

applicable NBFC has a valid recourse shall

be made. The realisable value is to be

estimated on a realistic basis;

(b) In addition to item (a) above, depending

upon the period for which the asset has

remained doubtful,provisionto the extent

of 20 per cent to 50 per cent of the secured

portion (i.e. Estimated realisable value of

the outstanding) shall be made on the

following basis:-

Period for which the asset has been considered as doubtful Up to one year

One to three years

More than three years

(iii) Sub-standard assets

Per cent of provision

A general provision of 10 per cent of total outstanding shall be made.

Lease and hire purchase assets -The provisioning requirements in respect of hire purchase and leased assets shall be as under:

Hire purchase assets - In respect of hire purchase assets, the total dues (overdue and future instalments taken together) as reduced by

the finance charges not credited to the profit and loss account and carried forward as unmatured finance charges; and

the depreciated value of the underlying asset shall be provided for.

Explanation: For the purpose of this paragraph,

the depreciated value of the asset shall be notionally computed as the original cost of the asset to be reduced by depreciation at the rate of twenty per cent per annum on a straight-line method; and

in the case of second hand asset, the original cost shall be the actual cost incurred for acquisition of such second-hand asset.

In respect of hire purchase and leased assets, additional provision shall be made as under:

(a) Where hire charges or lease rentals are overdue Nil

upto 12 months

(b) Where hire charges or lease rentals are overdue 10 per cent of the

for more than 12 months upto 24 monthsnet book value

for more than 24 months but upto 36 monthsnet book value

(d) Where hire charges or lease rentals are overdue 70 per cent of the

for more than 36 months but upto 48 monthsnet book value

(e) Where hire charges or lease rentals are overdue 100 per cent of the

for more than 48 monthsnet book value

On expiry of a period of 12 months after the due date of the last instalment of hire purchase/ leased asset, the entire net book value shall be fully provided for.

The amount of caution money/ margin money or security deposits kept by the borrower with the applicable NBFC in pursuance of the hire purchase agreement may be deducted against the provisions stipulated under clause

above, if not already taken into account while arriving at the equated monthly instalments under the agreement. The value of any other security available in pursuance to the hire purchase agreement shall be deducted only against the provisions stipulated under clause (ii) above.

The amount of security deposits kept by the borrower with the applicable NBFC in pursuance to the lease agreement together with the value of any other security available in pursuance to the lease agreement shall be deducted only against the provisions stipulated under clause (ii) above.

It is clarified that income recognition on and provisioning against NPAs are two different aspects of prudential norms and provisions as per the norms are required to be made on NPAs on total outstanding balances including the depreciated book value of the leased asset under reference after adjusting the balance, if any, in the lease adjustment account. The fact that income on an NPA has not been recognised shall not be taken as reason for not making provision.

An asset which has been renegotiated or rescheduled as referred to in paragraph 12(3)(ii)(b) of these Directions shall be a sub-standard asset or continue to remain in the same category in which it was prior to its renegotiation or re-schedulement as a doubtful asset or a loss asset as the case may be. Necessary provision shall be made as applicable to such asset till it is upgraded.

The balance sheet to be prepared by the NBFC shall be in accordance with the provisions contained in sub-paragraph (2) of paragraph 17 of the Directions.

All financial leases written on or after April 1, 2001 shall attract the provisioning requirements as applicable to hire purchase assets.

̀⠀ ⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ 伀 Ā Ȁ ⸀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Standard asset provisioning

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. The provision towards standard assets need not be netted from gross advances but shall be shown separately as ‘Contingent Provisions against Standard Assets’ in the balance sheet.

15A. Guidelines on Liquidity Risk Management Framework

Applicable non-deposit taking and all deposit taking NBFCs (irrespective of their asset size) shall adhere to the set of liquidity risk management guidelines as detailed in Annex II of these Directions. However, these guidelines will not apply to Type I NBFC-NDs6, Non-Operating Financial Holding Companies and Standalone Primary Dealers. It will be the responsibility of the Board of each NBFC to ensure that the guidelines are adhered to. The internal controls required to be put in place by NBFCs as per these guidelines shall be subject to supervisory review.

15B. Guidelines on Maintenance of Liquidity Coverage Ratio (LCR)

In addition, to the guidelines as detailed in para 15.A above, the following categories of NBFCs shall adhere to the guidelines on LCR including disclosure standards as provided in Annex III:

(i) All non-deposit taking NBFCs with asset size of ₹10,000 crore and above, and all deposit taking NBFCs irrespective of their asset size, shall maintain a liquidity buffer in terms of LCR which will promote resilience of NBFCs to potential liquidity disruptions by ensuring that they have sufficient High Quality Liquid Asset (HQLA) to survive any acute liquidity stress scenario lasting for 30 days. The stock of HQLA to be maintained by the NBFCs shall be minimum of 100 per cent of total net cash outflows over the next 30 calendar days. The LCR requirement shall be binding on NBFCs from December 1, 2020 with the minimum HQLAs to be held being 50 per cent of the LCR, progressively reaching up to the required level of 100 per cent by December 1, 2024, as per the timeline given below:

From December 1, December 1, December 1, December 1, December 1,

20202021202220232024

Minimum 50% 60% 70% 85% 100%

LCR

(ii) All non-deposit taking NBFCs with asset size of ₹5,000 crore and above but less than ₹10,000 crore shall also maintain the required level of LCR starting December 1, 2020, as per the timeline given below:

From December 1, December 1, December 1, December 1, December 1,

20202021202220232024

Minimum 30% 50% 60% 85% 100%

LCR

Type I NBFC-ND as defined in RBI press release dated June 17, 2016. 33

Core Investment Companies, Type I NBFC-NDs, Non-Operating Financial Holding Companies and Standalone Primary Dealers are exempt from the applicability of LCR norms.

16. Multiple NBFCs

Applicable NBFCs that are part of a corporate group or are floated by a common set of promoters shall not be viewed on a standalone basis. The total assets of the NBFCs in a group including deposit taking NBFCs, if any, shall be aggregated to determine if such consolidation falls within the asset sizes of the two categories i.e., those with asset size of below ₹500 crore and those with asset size of ₹500 crore and above. Regulations as applicable to the two categories shall be applicable to each of the non-deposit taking NBFC within the group. For this purpose, Statutory Auditors are required to certify the asset size of all the NBFCs in the Group. However, NBFC-D, within the group, if any, shall be governed under the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Direction, 2016 and Prudential Norms and other Directions as applicable to deposit taking NBFCs.

17. Disclosure in the balance sheet

Every applicable NBFC shall separately disclose in its balance sheet the provisions made as per these Directions without netting them from the income or against the value of assets.

The provisions shall be distinctly indicated under separate heads of account as under:-

provisions for bad and doubtful debts; and

provisions for depreciation in investments.

Such provisions shall not be appropriated from the general provisions and loss reserves held, if any, by the applicable NBFC.

Such provisions for each year shall be debited to the profit and loss account. The excess of provisions, if any, held under the heads general provisions and loss reserves shall be written back without making adjustment against them.

In addition to the above every applicable NBFC shall disclose the following particulars in its Balance Sheet:

Capital to Risk Assets Ratio (CRAR);

Exposure to real estate sector, both direct and indirect; and

Maturity pattern of assets and liabilities.

18. Accounting year

Every applicable NBFC shall prepare its balance sheet and profit and loss account as on March 31 every year. Whenever an applicable NBFC intends to extend the date of its balance sheet as per provisions of the Companies Act, it shall take prior approval of the Bank before approaching the Registrar of Companies for this purpose.

Even in cases where the Bank and the Registrar of Companies grant extension of time, the applicable NBFC shall furnish to the Bank a proforma balance sheet (unaudited) as on March 31 of the year and the statutory returns due on the said date. Every applicable NBFC shall finalise its balance sheet within a period of 3 months from the date to which it pertains.

18A. Declaration of dividend by applicable NBFCs

Applicable NBFCs shall comply with the following guidelines to declare dividends from the profits of the financial year ending March 31, 2022 and onwards.

The Board of Directors, while considering the proposals for dividend, shall take into account each of the following aspects:

Supervisory findings of the Reserve Bank on divergence in classification and provisioning for Non-Performing Assets (NPAs).

Qualifications in the Auditors Report to the financial statements.

Long term growth plans of the NBFC.

Only NBFCs that meet the following minimum prudential requirements shall be eligible to declare dividend:

NBFCs shall have met the minimum capital requirements prescribed under

para 6 of these Master Direction in each of the last three7 financial years including the financial year for which the dividend is proposed.

The net NPA ratio shall be less than six per cent in each of the last three years, including as at the close of the financial year for which dividend is proposed to be declared.

NBFCs shall comply with the provisions of Section 45 IC of the Reserve Bank of India Act, 1934.

NBFCs shall be compliant with the prevailing regulations/ guidelines issued by the Reserve Bank. The Reserve Bank shall not have placed any explicit restrictions on declaration of dividend.

NBFCs that meet the eligibility criteria specified in paragraph (2) above can declare dividend upto a dividend payout ratio of 50 per cent. There will be no ceiling on dividend payout ratio for eligible NBFCs that do not accept public funds and have no customer interface.

An NBFC which does not meet the applicable capital ratio requirements and/ or the net NPA ratio requirement as above, for each of the last three financial years, shall be eligible to declare dividend, subject to a cap of 10 per cent on the dividend payout ratio, provided the NBFC complies with both the following conditions:

̀⠀Ā⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ȀȀ ̀⠀ ⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ meets the applicable minimum capital requirement, as per these Master Directions, in the financial year for which it proposes to pay dividend, and

̀⠀Ā⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ȀȀ ̀⠀ ⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ has net NPA of less than four per cent as at the close of the said financial year.

The Board shall ensure that the total dividend proposed for the financial year does not exceed the ceilings specified in these guidelines. The Reserve Bank shall not entertain any request for ad-hoc dispensation on declaration of dividend.

NBFCs declaring dividend shall report details of dividend declared during the financial year as per the format prescribed in Annex III A. The report shall be furnished within a fortnight after declaration of dividend to the Regional Office of the Department of Supervision of the Reserve Bank.

7 Where an NBFC has been in existence for less than three financial years, it shall be since registration.

19. Schedule to the balance sheet

Every applicable NBFC shall append to its balance sheet prescribed under the Companies Act, 2013, the particulars in the schedule as set out in Annex IV.

20. Transactions in Government securities

Every applicable NBFC shall undertake transactions in Government securities through its gilt account or its demat account or any other account, as permitted by the Bank.

Loans against NBFCs own shares prohibited No applicable NBFC shall lend against its own shares.

Loans against security of shares

Applicable NBFC lending against the collateral of listed shares shall,

maintain a Loan to Value (LTV) ratio of 50 per cent for loans granted against the collateral of shares. LTV ratio of 50 per cent shall be maintained at all times. Any shortfall in the maintenance of the 50 per cent LTV occurring on account of movement in the share prices shall be made good within 7 working days.

in case where lending is being done for investment in capital markets, accept only Group 1 securities (specified in SMD/ Policy/ Cir - 9/2003 dated March 11, 2003 as amended from time to time, issued by SEBI) as collateral for loans of value more than ₹5 lakh, subject to review by the Bank.

report on-line to stock exchanges on a quarterly basis, information on the shares pledged in their favour, by borrowers for availing loans in format as given in Annex V.

Concentration of credit/ investment for applicable NBFC (except NBFC-MFIs with asset size of ₹500 crore and above)

(1) No applicable NBFC shall,

lend to

any single borrower exceeding fifteen per cent of its owned fund; and

any single group of borrowers exceeding twenty five per cent of its owned fund;

invest in

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;

lend and invest (loans/ investments taken together) exceeding

twenty five per cent of its owned fund to a single party; and

forty per cent of its owned fund to a single group of parties.

Provided that the ceiling on the investment in shares of another company shall not be applicable to an applicable NBFC in respect of investment in the equity capital of an insurance company up to the extent specifically permitted, in writing, by the Bank.

Provided further that an applicable NBFC may exceed the concentration of credit/ investment norms, by 5 per cent for any single party and by 10 per cent for a single group of parties, if the additional exposure is on account of infrastructure loan and/ or investment.

Provided further that nothing contained in this paragraph shall apply to

investments of applicable NBFCs in shares of

its subsidiaries;

companies in the same group,

to the extent they have been reduced from Owned Funds for the calculation of NOF and

the book value of debentures, bonds, outstanding loans and advances (including hire-purchase and lease finance) made to, and deposits with,-

subsidiaries of the applicable NBFC; and

companies in the same group,

to the extent they have been reduced from Owned Funds for the calculation of NOF.

Provided that Infrastructure Finance Companies may exceed the concentration of credit norms

in lending to:

any single borrower, by ten per cent of its owned fund; and

any single group of borrowers, by fifteen per cent of its owned fund;

in lending to and investing in, (loans/ investments taken together)

a single party, by five percent of its owned fund; and

a single group of parties, by ten percent of its owned fund.

Provided further that the concentration of credit/ investment norms shall not apply to any applicable NBFC not accessing public funds in India, either directly or indirectly and not issuing guarantees.

ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ЀĀ Ȁ ⤀Ā ȀȀ ̀⠀Ā⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Every applicable NBFC (other than NBFC-D) shall formulate a policy in respect of exposures to a single party / a single group of parties.

ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ЀĀ Ȁ ⤀Ā ȀȀ ̀⠀Ā⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ An applicable NBFC which is held by an NOFHC shall not

have any exposure (credit and investments including investments in the equity/ debt capital instruments) to the Promoters/ Promoter Group entities or individuals associated with the Promoter Group or the NOFHC;

make investment in the equity/ debt capital instruments in any of the financial entities under the NOFHC;

invest in equity instruments of other NOFHCs.

Explanation: For the purposes of this paragraph, the expression, 'Promoter' and 'Promoter Group' shall have the meanings assigned to those expressions in the "Guidelines for Licensing of New Banks in the Private Sector" issued by the Bank –

Annex VI.

Notes:

For determining the limits, off-balance sheet exposures shall be converted into credit risk by applying the conversion factors as explained in paragraph ‘Explanation II’ of Chapter IV of these Directions.

The investments in debentures for the purposes specified in this paragraph shall be treated as credit and not investment.

These ceilings shall be applicable to the credit/ investment by an applicable NBFC to companies/firms in its own group as well as to the borrowers/ investee company’s group.

a. In case of factoring on "with-recourse" basis, the exposure shall be reckoned on the assignor.

b. In case of factoring on "without-recourse" basis, the exposure shall be reckoned on the debtor, irrespective of credit risk cover/ protection provided, except in cases of international factoring where the entire credit risk has been assumed by the import factor.

Information with respect to change of address, directors, auditors, etc. to be submitted

Every applicable NBFC shall communicate, not later than one month from the occurrence of any change in:

the complete postal address, telephone number/s and fax number/s of the registered/corporate office;

the names and residential addresses of the directors of the company;

the names and the official designations of its principal officers;

the names and office address of the auditors of the company; and

the specimen signatures of the officers authorised to sign on behalf of the

company

to the Regional Office of the Department of Supervision of the Bank under whose jurisdiction it is registered.

25. Prudential Framework for Resolution of Stressed Assets

Applicable NBFCs shall follow the instructions issued vide circular dated DBR.No.BP.BC.45/21.04.048/2018-19 dated June 7, 2019 on ‘The Prudential Framework for Resolution of Stressed Assets’. For projects under implementation,

the instructions in Annex-VII and circular DoR. NBFC (PD).CC.No.110/03.10.001/2019-20 dated April 17, 2020 on ‘Prudential Norms on Income Recognition, Asset Classification and Provisioning Pertaining to Advances - Projects under Implementation’ shall be applicable.

Deleted

Loans against security of single product - Gold Jewellery

(1) (a) All applicable NBFCs shall

(i) maintain a Loan-to-Value (LTV) Ratio not exceeding 75 per cent for loans granted against the collateral of gold jewellery;

Provided that the value of gold jewellery for the purpose of determining the maximum permissible loan amount shall be the intrinsic value of the gold content therein and no other cost elements shall be added thereto. The intrinsic value of the gold jewellery shall be arrived at as detailed in paragraph 3 below.

(ii) disclose in their balance sheet the percentage of such loans to their total assets.

NBFCs shall not grant any advance against bullion / primary gold and gold coins. NBFCs shall not grant any advance for purchase of gold in any form including primary gold, gold bullion, gold jewellery, gold coins, units of Exchange Traded Funds (ETF) and units of gold mutual fund.

(2) Verification of the Ownership of Gold

Where the gold jewellery pledged by a borrower at any one time or cumulatively on loan outstanding is more than 20 grams, NBFCs shall keep a record of the verification of the ownership of the jewellery. The ownership verification need not necessarily be through original receipts for the jewellery pledged but a suitable document shall be prepared to explain how the ownership of the jewellery has been determined, particularly in each and every case where the gold jewellery pledged by a borrower at any one time or cumulatively on loan outstanding is more than 20 grams.

NBFCs shall have an explicit policy in this regard as approved by the Board in their overall loan policy.

Standardization of Value of Gold accepted as collateral in arriving at LTV Ratio The gold jewellery accepted as collateral by the Non-Banking Financial Company shall be valued by the following method:

(a) The gold jewellery accepted as collateral by the Non-Banking Financial Company shall be valued by taking into account the preceding 30 days’ average of the closing price of 22 carat gold as per the rate as quoted by the Bombay Bullion Association Ltd. (BBA) or the historical spot gold price data publicly disseminated by a commodity exchange regulated by the Forward Markets Commission.

If the purity of the gold is less than 22 carats, the NBFC shall translate the collateral into 22 carat and state the exact grams of the collateral. In other words, jewellery of lower purity of gold shall be valued proportionately.

NBFC, while accepting gold as collateral, shall give a certificate to the borrower on their letterhead, of having assayed the gold and state the purity (in terms of carats) and the weight of the gold pledged.

NBFCs may have suitable caveats to protect themselves against disputes during redemption, but the certified purity shall be applied both for determining the maximum permissible loan and the reserve price for auction.

(4) Auction

The auction shall be conducted in the same town or taluka in which the branch that has extended the loan is located. NBFCs can however pool gold jewellery from different branches in a district and auction it at any location within the district, subject to meeting the following conditions:

The first auction has failed.

The NBFC shall ensure that all other requirements of the extant directions

regarding auction (prior notice, reserve price, arms-length relationship, disclosures, etc.) are met.

Non-adherence to the above conditions will attract strict enforcement action.

While auctioning the gold the NBFC shall declare a reserve price for the pledged ornaments. The reserve price for the pledged ornaments shall not be less than 85 per cent of the previous 30-day average closing price of 22 carat gold as declared by the Bombay Bullion Association Ltd. (BBA) or the historical spot gold price data publicly disseminated by a commodity exchange regulated by the Forward Markets Commission and value of the jewellery of lower purity in terms of carats shall be proportionately reduced.

It shall be mandatory on the part of the NBFCs to provide full details of the value fetched in the auction and the outstanding dues adjusted and any amount over and above the loan outstanding shall be payable to the borrower.

NBFCs shall disclose in their annual reports the details of the auctions conducted during the financial year including the number of loan accounts, outstanding amounts, value fetched and whether any of its sister concerns participated in the auction.

Safety and security measures to be followed by Non-Banking Financial Companies lending against collateral of gold jewellery

(a) Non-Banking Financial Companies, which are in the business of lending against collateral of gold jewellery, shall ensure that necessary infrastructure and facilities are put in place, including safe deposit vault and appropriate security measures for operating the vault, in each of its branches where gold jewellery is accepted as collateral. This is required to safeguard the gold jewellery accepted as collateral and to ensure convenience of borrowers.

No new branch/es shall be opened without suitable arrangements for security and for storage of gold jewellery, including safe deposit vault.

(6) Opening Branches exceeding one thousand in number Non-Banking Financial Company which are in the business of lending against collateral of gold jewellery shall obtain prior approval of the Bank to open branches exceeding 1000. However, NBFCs which already have more than 1000 branches shall approach the Bank for prior approval for any further branch expansion. Besides, no new branches shall be allowed to be opened without the facilities for storage of gold jewellery and minimum security facilities for the pledged gold jewellery.

Chapter - VI

Fair Practices Code for applicable NBFC

Applicable NBFCs having customer interface shall adopt the following guidelines:

28. Applications for loans and their processing

All communications to the borrower shall be in the vernacular language or a language as understood by the borrower.

Loan application forms shall include necessary information which affects the interest of the borrower, so that a meaningful comparison with the terms and

conditions offered by other NBFCs can be made and informed decision can be taken by the borrower. The loan application form shall indicate the documents required to be submitted with the application form.

Applicable NBFCs shall devise a system of giving acknowledgement for receipt of all loan applications. Preferably, the time frame within which loan applications will be disposed of shall also be indicated in the acknowledgement.

29. Loan appraisal and terms/ conditions

Applicable NBFCs shall convey in writing to the borrower in the vernacular language as understood by the borrower by means of sanction letter or otherwise, the amount of loan sanctioned along with the terms and conditions including annualised rate of interest and method of application thereof and keep the acceptance of these terms and conditions by the borrower on its record. As complaints received against NBFCs generally pertain to charging of high interest/ penal interest, applicable NBFCs shall mention the penal interest charged for late repayment in bold in the loan agreement.

Borrowers may not fully be aware of the terms and conditions of the loans including rate of interest at the time of sanction of loans, either because the NBFC does not provide details of the same or the borrower has no time to look into detailed agreement. Not furnishing a copy of the loan agreement or enclosures quoted in the loan agreement is an unfair practice and this could lead to disputes between the NBFC and the borrower with regard to the terms and conditions. Applicable NBFCs shall furnish a copy of the loan agreement as understood by the borrower along with a copy each of all enclosures quoted in the loan agreement to all the borrowers at the time of sanction / disbursement of loans.

30. Disbursement of loans including changes in terms and conditions

Applicable NBFCs shall give notice to the borrower in the vernacular language or a language as understood by the borrower of any change in the terms and conditions including disbursement schedule, interest rates, service charges, prepayment charges etc. Applicable NBFCs shall also ensure that changes in interest rates and charges are effected only prospectively. A suitable condition in this regard must be incorporated in the loan agreement.

Decision to recall/ accelerate payment or performance under the agreement shall be in consonance with the loan agreement.

Applicable NBFCs shall release all securities on repayment of all dues or on realisation of the outstanding amount of loan subject to any legitimate right or lien for any other claim they may have against borrower. If such right of set off is to be exercised, the borrower shall be given notice about the same with full particulars about the remaining claims and the conditions under which applicable NBFCs are entitled to retain the securities till the relevant claim is settled/ paid.

31. General

Applicable NBFCs shall refrain from interference in the affairs of the borrower except for the purposes provided in the terms and conditions of the loan agreement (unless information, not earlier disclosed by the borrower, has been noticed).

In case of receipt of request from the borrower for transfer of borrowal account, the consent or otherwise i.e., objection of the applicable NBFC, if any, shall be conveyed within 21 days from the date of receipt of request. Such transfer shall be as per transparent contractual terms in consonance with law.

In the matter of recovery of loans, an applicable NBFC shall not resort to undue harassment viz., persistently bothering the borrowers at odd hours, use muscle power for recovery of loans etc. As complaints from customers also include rude behaviour from the staff of the companies, applicable NBFC shall ensure that the staff are adequately trained to deal with the customers in an appropriate manner.

As a measure of customer protection and also in order to bring in uniformity with regard to prepayment of various loans by borrowers of banks and NBFCs, applicable NBFCs shall not charge foreclosure charges/ pre-payment penalties on any floating rate term loan sanctioned for purposes other than business to individual borrowers, with or without co-obligant(s).

32. Responsibility of Board of Directors

The Board of Directors of applicable NBFCs shall also lay down the appropriate grievance redressal mechanism within the organization. Such a mechanism shall ensure that all disputes arising out of the decisions of lending institutions'

functionaries are heard and disposed of at least at the next higher level. The Board of Directors shall also provide for periodical review of the compliance of the Fair Practices Code and the functioning of the grievances redressal mechanism at various levels of management. A consolidated report of such reviews shall be submitted to the Board at regular intervals, as may be prescribed by it.

33. Grievance Redressal Officer

At the operational level, all applicable NBFCs shall display the following information prominently, for the benefit of their customers, at their branches / places where business is transacted:

the name and contact details (Telephone / Mobile nos. as also email address) of the Grievance Redressal Officer who can be approached by the public for resolution of complaints against the Company.

If the complaint/ dispute is not redressed within a period of one month, the customer may appeal to the Officer-in-Charge of the Regional Office of Department of Supervision of RBI (with complete contact details), under whose jurisdiction the registered office of the applicable NBFC falls.

34. Ombudsman for NBFCs

(1) Reserve Bank – Integrated Ombudsman Scheme, 2021

NBFCs covered under the Reserve Bank – Integrated Ombudsman Scheme, 2021 shall appoint Principal Nodal Officer in accordance with directions provided under the said Scheme.

(2) Appointment of Internal Ombudsman

NBFCs fulfilling the criteria laid down under the circular on ‘Appointment of Internal Ombudsman by Non-Banking Financial Companies’ dated November 15, 2021 shall appoint the Internal Ombudsman and adhere to the corresponding guidelines.

35. Language and mode of communicating Fair Practice Code

Fair Practices Code (which shall preferably be in the vernacular language or a language as understood by the borrower) based on the directions outlined hereinabove shall be put in place by all applicable NBFCs having customer interface

with the approval of their Boards. Applicable NBFCs will have the freedom of drafting the Fair Practices Code, enhancing the scope of the directions but in no way sacrificing the spirit underlying the above directions. The same shall be put up on their website, if any, for the information of various stakeholders.

36. Regulation of excessive interest charged by applicable NBFC

The Board of each applicable NBFC shall adopt an interest rate model taking into account relevant factors such as cost of funds, margin and risk premium and determine the rate of interest to be charged for loans and advances. The rate of interest and the approach for gradations of risk and rationale for charging different rate of interest to different categories of borrowers shall be disclosed to the borrower or customer in the application form and communicated explicitly in the sanction letter.

The rates of interest and the approach for gradation of risks shall also be made available on the website of the companies or published in the relevant newspapers. The information published in the website or otherwise published shall be updated whenever there is a change in the rates of interest.

The rate of interest must be annualised rate so that the borrower is aware of the exact rates that would be charged to the account.

37. Complaints about excessive interest charged by Applicable NBFCs

The Bank has been receiving several complaints regarding levying of excessive interest and charges on certain loans and advances by NBFC. Though interest rates are not regulated by the Bank, rates of interest beyond a certain level may be seen to be excessive and can neither be sustainable nor be conforming to normal financial practice. Boards of applicable NBFCs, therefore, shall lay out appropriate internal principles and procedures in determining interest rates and processing and other charges. In this regard the directions in the Fair Practices Code about transparency in respect of terms and conditions of the loans are to be kept in view.

38. Repossession of vehicles financed by applicable NBFCs

ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ЀȀ ̀⠀ ⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Applicable NBFCs must have a built-in re-possession clause in the contract/loan agreement with the borrower which must be legally enforceable. To ensure

transparency, the terms and conditions of the contract/loan agreement shall also contain provisions regarding:

notice period before taking possession;

circumstances under which the notice period can be waived;

the procedure for taking possession of the security;

a provision regarding final chance to be given to the borrower for repayment of loan before the sale/ auction of the property;

the procedure for giving repossession to the borrower; and

the procedure for sale/ auction of the property.

A copy of such terms and conditions must be made available to the borrower. Applicable NBFCs shall invariably furnish a copy of the loan agreement along with a copy each of all enclosures quoted in the loan agreement to all the borrowers at the time of sanction/ disbursement of loans, which forms a key component of such contracts/loan agreements.

39. Lending against collateral of gold jewellery

While lending to individuals against gold jewellery, applicable NBFCs shall adopt the following in addition to the general directions as above.

They shall put in place Board approved policy for lending against gold that shall inter alia, cover the following:

Adequate steps to ensure that the KYC guidelines stipulated by the Bank are complied with and to ensure that adequate due diligence is carried out on the customer before extending any loan,

Proper assaying procedure for the jewellery received,

Internal systems to satisfy ownership of the gold jewellery,

Adequate systems for storing the jewellery in safe custody, reviewing the systems on an on-going basis, training the concerned staff and periodic inspection by internal auditors to ensure that the procedures are strictly adhered to. Normally, such loans shall not be extended by branches that do not have appropriate facility for storage of the jewellery,

The jewellery accepted as collateral shall be appropriately insured,

Transparent auction procedure in case of non-repayment with adequate prior notice to the borrower. There shall be no conflict of interest and the auction

process must ensure that there is arm’s length relationship in all transactions during the auction including with group companies and related entities,

The auction shall be announced to the public by issue of advertisements in at least two newspapers, one in vernacular and another in national daily newspaper,

As a policy, the applicable NBFCs themselves shall not participate in the auctions held,

Gold pledged shall be auctioned only through auctioneers approved by the Board,

The policy shall also cover systems and procedures to be put in place for dealing with fraud including separation of duties of mobilization, execution and approval.

The loan agreement shall also disclose details regarding auction procedure.

Other Instructions

ȀȀ ̀⠀Ā⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ ਀ ЀĀ Ȁ ⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ NBFCs financing against the collateral of gold must insist on a copy of the PAN Card of the borrower for all transaction above ₹5 lakh.

ȀȀ ̀⠀Ā⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ ਀ ЀĀ Ȁ ⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Documentation across all branches must be standardized.

ȀȀ ̀⠀Ā⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ ਀ ЀĀ Ȁ ⤀Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ Ā ᜀ NBFCs shall not issue misleading advertisements like claiming the availability of loans in a matter of 2-3 minutes.

Chapter – VII

Specific Directions applicable to NBFC-Factors and NBFC-ICCs registered

under the Factoring Regulation Act, 20118

40. Registration

Every company intending to undertake factoring business shall make an application to the Bank for grant of CoR as NBFC-Factor under the Factoring Regulation Act, 2011 and shall ensure compliance with Principal Business Criteria (PBC) as stipulated in Paragraph 42 of these directions.

Notification No. DOR.FIN.080/CGM(JPS) – 2022 dated January 14, 2022 (published in Official Gazette – Extraordinary – Part-III, Section 4 dated January 17, 2022)

Any existing NBFC-ICC, intending to undertake factoring business, shall make an application to the Bank for grant of CoR under the Factoring Regulation Act, 2011, if it satisfies the following eligibility criteria:

not accepting or holding public deposits;

total assets of ₹1,000 crore and above, as per the last audited balance sheet;

meeting the NOF requirement as prescribed in Paragraph 41 of these directions;

regulatory compliance.

Any existing NBFC-ICC, which does not satisfy the above conditions but intends to undertake factoring business, shall approach the Bank for conversion from NBFC-ICC to NBFC-Factor. Such NBFC-ICCs shall comply with the PBC as specified in Paragraph 42 of these directions.

Application for such conversion shall be submitted with all supporting documents meant for new registration as NBFC-Factor, together with surrender of original CoR issued by the Bank to the NBFC-ICC under Section 45IA of the RBI Act, 1934.

An entity not registered with the Bank under the Factoring Regulation Act, 2011 may conduct the business of factoring, if it is an entity mentioned in Section 5 of the Factoring Regulation Act, 2011, i.e. a bank or a body corporate established under an Act of Parliament or State Legislature, or a Government Company;

NBFC-Factor or eligible NBFC-ICC which has been granted CoR by the Bank under the Factoring Regulation Act, 2011, shall commence factoring business within six months from the date of grant of CoR.

41. Net Owned Fund

Every company seeking registration as NBFC-Factor shall have a minimum Net Owned Fund (NOF) of ₹5 crore, or as specified by the Bank from time to time.

42. Principal Business

An NBFC-Factor shall ensure that its financial assets in the factoring business constitute at least fifty per cent of its total assets and its income derived from factoring business is not less than fifty per cent of its gross income.

43. Conduct of business and prudential regulations

NBFC-Factors or eligible NBFC-ICCs which have been granted CoR under the Factoring Regulation Act, 2011 shall conduct the factoring business in accordance with the Factoring Regulation Act, 2011 and rules and regulations framed under it or the directions and guidelines issued by the Bank from time to time.

44. Asset Classification

In addition to the prudential norms contained in Chapter V of these Directions, for an NBFC-Factor or an NBFC-ICC, a receivable acquired under factoring which is not paid within three months of due date as applicable, shall be treated as non-performing asset (NPA) irrespective of when the receivable was acquired by the factor or whether the factoring was carried out on "with recourse" basis or "without-recourse" basis. The entity on which the exposure was booked shall be shown as NPA and provisioning made accordingly.

45. Risk Management

Proper and adequate control and reporting mechanisms shall be put in place before factoring business is undertaken by an NBFC-Factor or eligible NBFC-ICC which has been granted CoR under the Factoring Regulation Act, 2011.

a. NBFCs shall carry out a thorough credit appraisal of the debtors before entering into any factoring arrangement or prior to establishing lines of credit with the export factor.

b. Factoring services shall be extended in respect of invoices which represent genuine trade transactions.

c. Since under “without recourse” factoring transactions, the NBFC is underwriting the credit risk on the debtor, there shall be a clearly laid down board-approved limit for all such underwriting commitments.

d. NBFCs and banks shall share information about common borrowers. For the purpose of exchange of information, the assignor will be deemed to be the borrower. NBFCs shall ensure to intimate the limits sanctioned to the borrower to the concerned banks/ NBFCs and details of debts factored so as to avoid double financing.

46. Export/ Import Factoring

Foreign Exchange Department (FED) of the Bank gives authorization to Factors under FEMA, 1999. NBFC-Factors or NBFC-ICCs which have been granted CoR under the Factoring Regulation Act, 2011, intending to deal in foreign exchange through export/ import factoring, shall make an application to FED for necessary authorization under FEMA, 1999 to deal in foreign exchange and adhere to the terms and conditions prescribed by FED and all the relevant provisions of the FEMA or Rules, Regulations, Notifications, Directions or Orders made thereunder from time to time.

Chapter – VIII

Specific Directions applicable to Infrastructure Debt Fund - Non-Banking

Financial Companies (IDF-NBFCs)

The IDF shall be set up either as a trust or as a company. A trust based IDF shall normally be a Mutual Fund (MF) while a company based IDF shall normally be a NBFC. IDF- NBFC shall raise resources through issue of either Rupee or Dollar denominated bonds of minimum 5 year maturity. With a view to facilitate better ALM, IDF-NBFCs can raise funds through shorter tenor bonds and commercial papers (CPs) from the domestic market to the extent of upto 10 per cent of their total outstanding borrowings. IDF-MF shall be regulated by SEBI while IDF-NBFC shall be regulated by the Bank.

Eligibility Parameters

(1) NBFCs as Sponsors of IDF-MFs

All NBFCs shall be eligible to sponsor (sponsorship as defined by SEBI Regulations for Mutual Funds) IDFs as Mutual Funds with prior approval of the Bank subject to the following conditions, in addition to those prescribed by SEBI:

The NBFC shall have a minimum Net Owned Funds (NOF) of ₹300 crore and Capital to Risk Weighted Assets (CRAR) of 15 per cent;

Its net NPAs shall be less than 3 per cent of net advances;

It shall have been in existence for at least 5 years;

It shall be earning profits for the last three years and its performance shall be satisfactory;

The CRAR of the NBFC post investment in the IDF-MF shall not be less than the regulatory minimum prescribed for it;

The NBFC shall continue to maintain the required level of NOF after accounting for investment in the proposed IDF-MF and

There shall be no supervisory concerns with respect to the NBFC.

(2) IFCs setting up IDF-NBFCs

Only NBFC-IFCs can sponsor IDF-NBFC with prior approval of the Bank and subject to the following conditions.

Sponsor IFCs shall be allowed to contribute a maximum of 49 percent to the equity of the IDF-NBFCs with a minimum equity holding of 30 percent of the equity of IDF-NBFCs;

Post investment in the IDF-NBFC, the sponsor NBFC-IFC must maintain minimum CRAR and NOF prescribed for IFCs;

There are no supervisory concerns with respect to the IFC.

(3) Tripartite Agreement

IDF-NBFCs shall enter into Tripartite Agreements to which, the Concessionaire, the Project Authority and IDF-NBFC shall be parties. Tripartite Agreement binds all the parties thereto to the terms and conditions of the other Agreements referred to therein also and which collectively provide, inter alia, for the following:

take over a portion of the debt of the Concessionaire availed from Senior Lenders,

a default by the Concessionaire, shall trigger the process for termination of the agreement between Project Authority and Concessionaire,

the Project Authority shall redeem the bonds issued by the Concessionaire which have been purchased by IDF-NBFC, from out of the termination payment as per the Tripartite Agreement and other Agreements referred to therein (compulsory buyout),

the fee payable by IDF-NBFC to the Project Authority as mutually agreed upon between the two.

NBFC and IFCs that fulfil the eligibility criteria as above shall approach the Central Office of the Department of Regulation, Reserve Bank of India, for sponsoring IDFs as MFs and NBFCs, as applicable.

49. Investment by NBFCs and IFCs in IDFs

The exposure of sponsor NBFCs/ IFCs and non-sponsor NBFCs/ IFCs to the equity and debt of the IDFs shall be governed by the extant credit concentration norms as given under Chapter V of these Directions. As regards foreign exchange related aspects of the functioning of IDF-NBFCs, the guidelines issued by Foreign Exchange Department, of the Bank as amended from time to time shall be adhered to.

50. Credit Rating

IDF-NBFC shall have at the minimum, a credit rating grade of 'A' issued by any of the SEBI-registered Credit Rating Agencies.

51. Capital Adequacy

The IDF-NBFC shall have at the minimum CRAR of 15 per cent and Tier II Capital of IDF–NBFC shall not exceed Tier I.

52. Investment by IDF-NBFCs

IDF-NBFCs can invest in post COD infrastructure projects which have completed at least one year of satisfactory commercial operation that are:

PPP projects and are a party to a Tripartite Agreement with the Concessionaire and the Project Authority for ensuring a compulsory buyout with termination payment.

non-PPP projects and PPP projects without a Project Authority, in sectors where there is no Project Authority.

53. Credit Concentration Norms

In addition to the provisions under Chapter V of these Directions, the following credit concentration norms shall be applicable to IDF-NBFCs

for PPP and post COD infrastructure projects which have completed at least one year of satisfactory commercial operation and the IDF-NBFC is a party to a Tripartite Agreement with the Concessionaire and the Project Authority for ensuring a compulsory buyout with termination payment, the following additional exposures shall be applicable:

The maximum exposure that an IDF-NBFC can take on individual projects shall be at 50 per cent of its total Capital Funds [Tier I plus Tier II as defined in Chapter II of these Directions].

An additional exposure up to 10 per cent can be taken at the discretion of the Board of the IDF-NBFC.

The Bank may, upon receipt of an application from an IDF-NBFC and on being satisfied that the financial position of the IDF-NBFC is satisfactory, permit additional exposure up to 15 per cent (over 60 per cent) subject to such conditions as it may deem fit to impose regarding additional prudential safeguards.

Exposure in respect of other assets shall be governed by the directions as applicable to Infrastructure Finance Companies as given in paragraph 23 of these Directions.

Chapter – IX

Specific directions applicable to Non-Banking Financial Company – Micro Finance Institutions (NBFC-MFIs) and Microfinance Loans of applicable NBFCs including NBFC-MFIs

54. Entry Point Norms

All new companies desiring registration as NBFC-MFIs shall need a minimum NOF of ₹5 crore (except those in the North Eastern Region of the country which will require NOF of ₹2 crore till further notice, as hitherto) and shall comply, from the beginning, with all other criteria applicable to NBFC-MFIs.

Prudential Norms

(i) Capital Adequacy

NBFC-MFIs shall maintain a capital adequacy ratio consisting of Tier I and Tier II Capital which shall not be less than 15 per cent of its aggregate risk weighted assets. The total of Tier II Capital at any point of time, shall not exceed 100 per cent of Tier I Capital. The risk weights for on-balance sheet assets and the credit conversion factor for off-balance sheet items will be as provided in Chapter IV of these directions.

Note:

For loans guaranteed by Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH), NBFC-MFIs shall assign zero risk weight for the guaranteed portion. The balance outstanding in excess of the guaranteed portion shall attract a risk-weight as detailed in Chapter IV of these directions.

Asset classification and provisioning norms All NBFC-MFIs shall adopt the following norms:

Asset Classification Norms

Standard asset means the asset in respect of which, no default in repayment of principal or payment of interest is perceived and which does not disclose any problem nor carry more than normal risk attached to the business;

Non-performing asset means an asset for which, interest/principal payment has remained overdue for a period of 90 days or more.

Provisioning Norms

For non-performing assets related to microfinance loans of NBFC-MFIs, provisioning norms shall be as below:

The aggregate loan provision to be maintained by NBFC-MFIs at any point of time shall not be less than the higher of (a) 1 per cent of the outstanding loan portfolio or (b) 50 per cent of the aggregate loan instalments which are overdue for more than 90 days and less than 180 days and 100 per cent of the aggregate loan instalments which are overdue for 180 days or more.

If the advance covered by Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH) guarantee becomes non-performing, no provision need be made towards the guaranteed portion. The amount outstanding in excess of the guaranteed portion shall be provided for as per provisioning norms as mentioned in paragraph 13 of these Directions.

All other provisions contained in Chapter V of these Directions, where not contradictory to the contents of this paragraph, shall be applicable to NBFC-MFIs.

An NBFC, which does not qualify as an NBFC-MFI shall extend microfinance loans to micro finance sector, which in aggregate does not exceed 25 per cent of its total assets.

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Channelizing Agents for Schemes operated by Central/ State Government Agencies

(i) NBFC-MFIs acting as Channelizing Agents for Schemes operated by Central/ State Government Agencies shall abide by the following guidelines:

loans disbursed or managed by NBFC-MFIs in their capacity as channelizing agents for Central/ State Government Agencies shall be considered as a separate business segment. These loans shall not be included either in the numerator (microfinance loans) or the denominator (total assets) for the

purpose of determining compliance with the minimum threshold of microfinance loans.

The NBFC-MFIs may act as channelising agents for distribution of loans under special schemes of Central/ State Government Agencies subject to following conditions:

accounts and records for such loans as well as funds received/ receivable from concerned agencies shall be maintained in the books of NBFC-MFI distinct from other assets and liabilities, and depicted in the financials/ final accounts/balance sheet with requisite details and disclosures as a separate segment;

such loans shall be subject to applicable asset classification, income

recognition and provisioning norms as well as other prudential norms as

In view of instructions contained in Master Direction – Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022 dated March 14, 2022

applicable to NBFC-MFIs except in cases where the NBFC-MFI does not bear any credit risk;

all such loans shall be reported to credit information companies (CICs) to prevent multiple borrowings and present complete picture of indebtedness of a borrower.

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Geographical Diversification

NBFC-MFIs shall approach their Boards for fixing internal exposure limits to avoid any undesirable concentration in specific geographical locations.

63. Formation of SRO

All NBFC-MFIs shall become member of at least one Self-Regulatory Organization (SRO) which is recognized by the Bank and shall also comply with the Code of Conduct prescribed by the SRO. Further, the SRO holding recognition from the Bank shall have to adhere to a set of functions and responsibilities as mentioned in Annex XI. The same may be modified by the Bank from time to time to improve the efficiency of the sector.

64. Monitoring of Compliance

The responsibility for compliance to all regulations prescribed for NBFC-MFIs lies primarily with the NBFC-MFIs themselves. The industry associations/SROs shall also play a key role in ensuring compliance with the regulatory framework. In addition, banks’ lending to NBFC-MFIs shall also ensure that systems, practices and lending policies in NBFC-MFIs are aligned to the regulatory framework.

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65A. Directions for Microfinance Loans

Applicable NBFCs shall be guided by the Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022, as amended from time to time.

In view of instructions contained in Master Direction – Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022 dated March 14, 2022

Section – III

Governance Issues

Chapter - X

Acquisition/ Transfer of Control of Applicable NBFCs

An applicable NBFC, shall require prior written permission of the Bank for the following:

any takeover or acquisition of control of the applicable NBFC, which may or may not result in change of management;

any change in the shareholding of the applicable NBFCs, including progressive increases over time, which would result in acquisition/ transfer of shareholding of 26 per cent or more of the paid-up equity capital of the applicable NBFC.

Provided that, prior approval shall not be required in case of any shareholding going beyond 26 per cent due to buyback of shares/ reduction in capital where it has approval of a competent Court. The same shall be reported to the Bank not later than one month from its occurrence;

any change in the management of the applicable NBFC which results in change in more than 30 per cent of the directors, excluding independent directors.

Provided that, prior approval shall not be required in case of directors who get re-elected on retirement by rotation.

Notwithstanding paragraph 66 applicable NBFCs shall continue to inform the Bank regarding any change in their directors/ management.

Application for prior approval

Applicable NBFCs shall submit an application, in the company letter head, for obtaining prior approval of the Bank, along with the following documents:

(a) Information about the proposed directors/ shareholders as per the Annex XII;

(b) Sources of funds of the proposed shareholders acquiring the shares in the applicable NBFC;

Declaration by the proposed directors/ shareholders that they are not associated with any unincorporated body that is accepting deposits;

Declaration by the proposed directors/ shareholders that they are not associated with any company, the application for Certificate of Registration (CoR) of which has been rejected by the Bank;

Declaration by the proposed directors/ shareholders that there is no criminal case, including for offence under section 138 of the Negotiable Instruments Act, against them; and

Bankers' Report on the proposed directors/ shareholders.

Applications in this regard shall be submitted to the Regional Office of the Department of Supervision in whose jurisdiction the Registered Office of the applicable NBFC is located.

Requirement of Prior Public Notice about change in control/ management

(1) A public notice of at least 30 days shall be given before effecting the sale of, or transfer of the ownership by sale of shares, or transfer of control, whether with or without sale of shares. Such public notice shall be given by the applicable NBFC and also by the other party or jointly by the parties concerned, after obtaining the prior permission of the Bank.

The public notice shall indicate the intention to sell or transfer ownership / control, the particulars of transferee and the reasons for such sale or transfer of ownership / control. The notice shall be published in at least one leading national and in one leading local (covering the place of registered office) vernacular newspaper.

69A. Investment in applicable NBFCs from FATF non-compliant jurisdictions

NBFCs shall ensure compliance to the instructions as specified in paragraph 5A of these directions.

Chapter - XI

Corporate Governance

70. Constitution of Committees of the Board

(1) Audit Committee

All applicable NBFCs shall constitute an Audit Committee, consisting of not less than three members of its Board of Directors.

Explanation I: The Audit Committee constituted by an applicable NBFC as required under section 177 of the Companies Act, 2013 shall be the Audit Committee for the purposes of this paragraph.

Explanation II: The Audit Committee constituted under this paragraph shall have the same powers, functions and duties as laid down in section 177 of the Companies Act, 2013.

The Audit Committee must ensure that an Information System Audit of the internal systems and processes is conducted at least once in two years to assess operational risks faced by the applicable NBFCs.

(2) Nomination Committee

All applicable NBFCs shall form a Nomination Committee to ensure 'fit and proper' status of proposed/ existing directors.

Explanation I: The Nomination Committee constituted under this paragraph shall have the same powers, functions and duties as laid down in section 178 of the Companies Act, 2013.

(3) Risk Management Committee

To manage the integrated risk, all applicable NBFCs shall form a Risk Management Committee, besides the Asset Liability Management Committee.

71. Appointment of Chief Risk Officer

With the increasing role of NBFCs in direct credit intermediation, there is a need for NBFCs to augment risk management practices. While Boards of NBFCs should strive to follow best practices in risk management, NBFCs with asset size of more than ₹5000 crore in categories - Investment and Credit Companies, Infrastructure Finance Companies, Micro Finance Institutions, Factors and Infrastructure Debt

Funds shall appoint a CRO with clearly specified role and responsibilities. The CRO is required to function independently so as to ensure highest standards of risk management.

(2) The NBFCs shall strictly adhere to the following instructions in this regard:

The CRO shall be a senior official in the hierarchy of an NBFC and shall possess adequate professional qualification/ experience in the area of risk management.

The CRO shall be appointed for a fixed tenure with the approval of the Board. The CRO can be transferred/ removed from his post before completion of the tenure only with the approval of the Board and such premature transfer/ removal shall be reported to the Department of Supervision of the regional office of the Bank under whose jurisdiction the NBFC is registered. In case the NBFC is listed, any change in incumbency of the CRO shall also be reported to the stock exchanges.

The Board shall put in place policies to safeguard the independence of the CRO. In this regard, the CRO shall have direct reporting lines to the MD & CEO/ Risk Management Committee (RMC) of the Board. In case the CRO reports to the MD & CEO, the RMC/ Board shall meet the CRO without the presence of the MD & CEO, at least on a quarterly basis. The CRO shall not have any reporting relationship with the business verticals of the NBFC and shall not be given any business targets. Further, there shall not be any ‘dual hatting’ i.e., the CRO shall not be given any other responsibility.

The CRO shall be involved in the process of identification, measurement and mitigation of risks. All credit products (retail or wholesale) shall be vetted by the CRO from the angle of inherent and control risks. The CRO’s role in deciding credit proposals shall be limited to being an advisor.

In NBFCs that follow committee approach in credit sanction process for high value proposals, if the CRO is one of the decision makers in the credit sanction process, the CRO shall have voting power and all members who are part of the credit sanction process, shall individually and severally be liable for all the aspects, including risk perspective related to the credit proposal.

Fit and Proper Criteria

(1) All applicable NBFCs shall

ensure that a policy is put in place with the approval of the Board of Directors for ascertaining the fit and proper criteria of the directors at the time of appointment,

and on a continuing basis. The policy on the fit and proper criteria shall be on the lines of the Guidelines contained in Annex XIII;

obtain a declaration and undertaking from the directors giving additional information on the directors. The declaration and undertaking shall be on the lines of the format given in Annex XIV;

obtain a Deed of Covenant signed by the directors, which shall be in the format as given in Annex XV;

furnish to the Bank a quarterly statement on change of directors, and a certificate from the Managing Director of the applicable NBFC that fit and proper criteria in selection of the directors has been followed. The statement must reach the Regional Office of the Department of Supervision of the Bank where the company is registered, within 15 days of the close of the respective quarter. The

statement submitted by applicable NBFC for the quarter ending March 31, shall be certified by the auditors.

Provided that the Bank, if it deems fit and in public interest, reserves the right to examine the fit and proper criteria of directors of any NBFC irrespective of the asset size of such NBFC.

73. Disclosure and transparency

All applicable NBFCs shall put up to the Board of Directors, at regular intervals, as may be prescribed by the Board in this regard, the following:

(i) the progress made in putting in place a progressive risk management system and risk management policy and strategy followed by the applicable NBFC;

(ii) conformity with corporate governance standards viz., in composition of various committees, their role and functions, periodicity of the meetings and compliance with coverage and review functions, etc.

All applicable NBFCs shall also disclose the following in their Annual Financial Statements, with effect from March 31, 2015:

registration/ licence/ authorisation, by whatever name called, obtained from other financial sector regulators;

ratings assigned by credit rating agencies and migration of ratings during the year;

penalties, if any, levied by any regulator;

information namely, area, country of operation and joint venture partners with regard to joint ventures and overseas subsidiaries and

Asset-Liability profile, extent of financing of parent company products, NPAs and movement of NPAs, details of all off-balance sheet exposures, structured products issued by them and other disclosures, as given in Annex XVI.

74. Rotation of partners of the Statutory Auditors Audit Firm

All applicable NBFCs shall rotate the partner/s of the Chartered Accountant firm conducting the audit, every three years so that same partner shall not conduct audit of the company continuously for more than a period of three years. However, the partner so rotated shall be eligible for conducting the audit of the applicable NBFC after an interval of three years, if the applicable NBFC, so decides. The applicable NBFC shall incorporate appropriate terms in the letter of appointment of the firm of auditors and ensure its compliance.

Note: The provisions of this para may be read with the provisions contained in circular, DoS.CO.ARG/SEC.01/08.91.001/2021-22 dated April 27, 2021 on ‘Guidelines for Appointment of Statutory Central Auditors (SCAs)/ Statutory Auditors (SAs)’, as amended from time to time.

75. Framing of Internal Guidelines

All applicable NBFCs shall frame their internal guidelines on corporate governance with the approval of the Board of Directors, enhancing the scope of the guidelines without sacrificing the spirit underlying the above guidelines and it shall be published on the company's website, if any, for the information of various stakeholders.

Section – IV

Miscellaneous Issues

Chapter - XII

Opening of Branch/ Subsidiary/ Joint Venture/ Representative Office or

Undertaking Investment Abroad by NBFCs

The Directions contained in this chapter are in addition to those prescribed by Foreign Exchange Department for overseas investment.

Prior approval of the Bank shall be obtained in cases of opening of branch/subsidiary/joint venture/representative office or undertaking investment abroad by applicable NBFCs. No applicable NBFC shall open subsidiaries/ joint

ventures/ representative office abroad or shall make investment in any foreign entities without obtaining prior approval in writing from the Bank. The application from the applicable NBFC seeking No Objection would be considered subject to general and specific conditions prescribed in these directions.

77. General conditions

Investment in non-financial service sectors shall not be permitted;

Direct investment in activities prohibited under FEMA or in sectoral funds shall not be permitted;

Investments shall be permitted only in those entities having their core activity regulated by a financial sector regulator in the host jurisdiction;

The aggregate overseas investment shall not exceed 100 per cent of the NoF. The overseas investment in a single entity, including its step-down subsidiaries, by way of equity or fund-based commitment shall not be more than 15 per cent of the applicable NBFCs owned funds;

Overseas investment shall not involve multi layered, cross jurisdictional structures and at most only a single intermediate holding entity shall be permitted;

The CRAR of the applicable NBFCs post investment in subsidiary abroad shall be not less than the regulatory prescriptions;

The applicable NBFC shall continue to maintain required level of NOF after accounting for investment in the proposed subsidiary/investment abroad as prescribed in the explanation to section 45-IA of the RBI Act, 1934;

The level of Net Non-Performing Assets of the applicable NBFC shall not be more than 5 per cent of the net advances;

The applicable NBFC shall be earning profit for the last three years and its performance in general shall be satisfactory during the period of its existence;

The applicable NBFC shall comply with the regulations issued under FEMA, 1999 from time to time;

Regulatory compliance and servicing of public deposits, if held by the applicable NBFC, shall be satisfactory;

The applicable NBFC shall comply with the KYC norms;

SPVs set up abroad or acquisition abroad shall be treated as investment or subsidiary/joint venture abroad, depending upon percentage of investment in overseas entity;

An annual certificate from statutory auditors shall be submitted by the applicable NBFC to the Regional Office of Department of Supervision where it is registered, certifying that it has fully complied with all the conditions stipulated under these directions for overseas investment;

If any adverse features come to the notice of the Bank, the permission granted shall be withdrawn. All approvals for investment abroad shall be subject to this condition.

Specific conditions

(1) Opening of Branch

As a general policy, applicable NBFCs shall not be allowed to open a branch abroad. However, applicable NBFCs which have already set up branch (es) abroad for undertaking financial business shall be allowed to continue to operate them subject to complying with the revised directions, as applicable.

(2) Opening of subsidiary abroad by applicable NBFCs

In case of opening of a subsidiary abroad by the applicable NBFC, all the conditions as stipulated above shall be applicable. The NoC to be issued by the Bank is independent of the overseas regulators’ approval process. In addition, the following stipulations are made, which shall be applicable to all applicable NBFCs:

In case of opening of subsidiary abroad, the parent applicable NBFC shall not be permitted to extend implicit or explicit guarantee to or on behalf of such subsidiaries;

No request for letter of comfort in favour of the subsidiary abroad from any institution in India shall be permitted;

It shall be ensured that applicable NBFCs liability in the proposed overseas entity is restricted to its either equity or fund based commitment to the subsidiary;

The subsidiary being established abroad shall not be a shell company i.e. "a company that is incorporated, but has no significant assets or operations." However, companies undertaking activities such as financial consultancy and advisory services with no significant assets shall not be considered as shell companies;

The subsidiary being established abroad by the applicable NBFC shall not be used as a vehicle for raising resources for creating assets in India for the Indian operations;

In order to ensure compliance of the provisions, the parent applicable NBFC shall obtain periodical reports/audit reports about the business undertaken by the subsidiary abroad and shall make them available to Reserve Bank and inspecting officials of the Bank;

If the subsidiary has not undertaken any activity or such reports are not forthcoming, the approvals given for setting up a subsidiary abroad shall be reviewed/ recalled;

The permission granted to any applicable NBFC for setting up of overseas subsidiary shall be subject to condition that the subsidiary shall make disclosure in its Balance Sheet to the effect that liability of the parent entity in the proposed overseas entity shall be limited to its either equity or fund-based commitment to the subsidiary;

All the operations of the subsidiary abroad shall be subject to regulatory prescriptions of the host country.

(3) Joint Ventures abroad

Investments abroad, other than in subsidiaries shall also be governed by same guidelines as those applicable to subsidiaries.

(4) Opening of representative offices abroad

The representative office can be set up abroad for the purpose of liaison work, undertaking market study and research but not undertaking any activity which involves outlay of funds, provided it is subject to regulation by a regulator in the host

country. As it is not envisaged that such office would be carrying on any activity other than liaison work, no line of credit shall be extended.

The parent NBFC shall obtain periodical reports about the business undertaken by the representative office abroad. If the representative office has not undertaken any activity or such reports are not forthcoming, the approvals given for the purpose shall be reviewed/ recalled.

Chapter - XIII

Miscellaneous Instructions

Expansion of activities of applicable NBFC through automatic route Applicable NBFC with Foreign Direct Investment (FDI) under the automatic route shall be permitted to undertake only those activities which are permissible under the automatic route. Diversification into any other activity shall require the prior approval of FIPB. A company which has entered into an area permitted under the FDI policy (such as software) and seeks to diversify into NBFC sector subsequently would also have to ensure compliance with the minimum capitalization norms and other regulations as applicable.

Enhancement of applicable NBFCs capital raising option for capital adequacy purposes

Taking into consideration, the need for enhanced funds for increasing business and meeting regulatory requirements, applicable NBFCs (other than Deposit taking NBFCs) are permitted to augment their capital funds by issue of Perpetual Debt Instruments (PDI) in accordance with the guidelines contained in the Annex XVII. Such PDI shall be eligible for inclusion as Tier I Capital to the extent of 15 per cent of total Tier I capital as on March 31 of the previous accounting year.

Ratings of applicable NBFCs

All applicable NBFCs shall furnish information about downgrading / upgrading of assigned rating of any financial product issued by them, within fifteen days of such a change in rating, to the Regional Office of the Bank under whose jurisdiction their registered office is functioning.

82. Ready Forward Contracts in Corporate Debt Securities

Non-deposit taking applicable NBFCs with asset size of ₹500 crore and above are eligible to participate in repo transactions in corporate debt securities. They shall comply with Repurchase Transactions (Repo) (Reserve Bank) Directions, 2018 as amended from time to time.

(a) Capital Adequacy

Risk weights for credit risk for assets that are the collateral for such transactions as well as risk weights for the counterparty credit risk shall be as applicable to the issuer/ counterparty under Chapter IV of these directions.

(b) Classification of balances in the accounts

Classification of balances in the various accounts viz. repo account, reverse repo account etc. shall be done in the relevant schedules similar to that of banks.

In all other matters related to such repo transactions, non-deposit taking applicable NBFCs with asset size of ₹500 crore and above, shall follow the Directions and accounting guidelines issued by Internal Debt Management Department, of the Bank.

83. Participation in Currency Options

Non-deposit taking applicable NBFCs with asset size of ₹500 crore and above, are allowed to participate in the designated currency options exchanges recognized by SEBI, as clients, subject to the Bank’s (Foreign Exchange Department) guidelines in the matter, only for the purpose of hedging their underlying forex exposures. Disclosures shall be made in the balance sheet regarding transactions undertaken, in accordance with the guidelines issued by SEBI.

84. Applicability of Know Your Customer (KYC) Direction, 2016

All applicable NBFCs having customer interface shall follow the Know Your Customer (KYC) Direction, 2016, issued by the Department of Regulation as amended from time to time.

Non- Reckoning of Fixed Deposits with banks as Financial Assets Investments in fixed deposits shall not be treated as financial assets and receipt of interest income on fixed deposits with banks shall not be treated as income from

financial assets as these are not covered under the activities mentioned in the definition of “financial Institution” in section 45-I(c) of the RBI Act, 1934. Besides, bank deposits constitute near money and can be used only for temporary parking of idle funds, and/ or in cases where the funds are parked in fixed deposits initially to fulfil the requirement of registration as NBFC i.e. NOF of ₹200 lakh, till commencement of NBFI business.

Operative instructions relating to relaxation/ modification in Ready Forward Contracts, Settlement of Government Securities Transactions and Sale of securities allotted in Primary Issues

All applicable NBFCs shall follow the guidelines on transactions in Government Securities as given in the circular IDMD.PDRS.05/10.02.01/2003-04 dated March 29, 2004 and IDMD.PDRS.4777 & 4783/10.02.01/2004-05, both dated May 11, 2005 and Repurchase Transactions (Repo) (Reserve Bank) Directions, 2018, dated July 24, 2018, as amended from time to time.

Reporting Platform for Corporate Bond Transactions

With effect from April 01, 2014, all applicable NBFCs should report their secondary market OTC trades in corporate bonds within 15 minutes of the trade on any of the stock exchanges (NSE, BSE and MCX-SX). The provisions of the circular dated IDMD.PCD.10/14.03.06/2013-14 dated February 24, 2014, as amended from time to time, shall be adhered to in this regard.

Unsolicited Commercial Communications - National Do Not Call Registry Applicable NBFCs shall

not engage Telemarketers (DSAs/ DMAs) who do not have any valid registration certificate from DoT, Government of India, as telemarketers; applicable NBFCs shall engage only those telemarketers who are registered in terms of the guidelines issued by TRAI, from time to time, for all their promotional/telemarketing activities.

furnish the list of Telemarketers (DSAs/DMAs) engaged by them along with the registered telephone numbers being used by them for making telemarketing calls to TRAI; and

ensure that all agents presently engaged by them register themselves with DoT as telemarketers.

Investment through Alternative Investment Funds - Calculation of NOF of an applicable NBFC

While arriving at the NOF, investment made by an applicable NBFC in entities of the same group concerns shall be treated alike, whether the investment is made directly or through an Alternative Investment Fund (AIF)/ Venture Capital Fund (VCF), and when the funds in the VCF have come from the applicable NBFC to the extent of 50 per cent or more; or where the beneficial owner, in the case of Trusts is the applicable NBFC, if 50 per cent of the funds in the Trusts are from the concerned applicable NBFC. For this purpose, "beneficial ownership" shall mean holding the power to make or influence decisions in the Trust and being the recipient of benefits arising out of the activities of the Trust. In arriving at the NOF, the substance would take precedence over form.

Treatment of deferred tax assets (DTA) and deferred tax liabilities (DTL) for computation of capital

(1) As creation of DTA or DTL shall give rise to certain issues impacting the balance sheet of the company, the regulatory treatment to be given to these issues shall be as under:

The balance in DTL account shall not be eligible for inclusion in Tier I or Tier II capital for capital adequacy purpose as it is not an eligible item of capital.

DTA shall be treated as an intangible asset and shall be deducted from Tier I Capital.

In this connection

DTL created by debit to opening balance of Revenue Reserves or to Profit and Loss Account for the current year shall be included under 'others' of "Other Liabilities and Provisions."

DTA created by credit to opening balance of Revenue Reserves or to Profit and Loss account for the current year shall be included under item 'others' of "Other Assets."

Intangible assets and losses in the current period and those brought forward from previous periods shall be deducted from Tier I capital.

DTA computed as under shall be deducted from Tier I capital:

DTA associated with accumulated losses; and

The DTA (excluding DTA associated with accumulated losses) net of DTL. Where the DTL is in excess of the DTA (excluding DTA associated with accumulated losses), the excess shall neither be adjusted against item (i) nor added to Tier I capital.

91. Introduction of Interest Rate Futures

Applicable NBFCs can participate in the designated interest rate futures (IRF) exchanges recognized by SEBI, as clients, subject to adherence to instructions contained in Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019 dated June 26, 2019, as amended from time to time, for the purpose of hedging their underlying exposures. Applicable NBFCs participating in IRF exchanges shall submit the data in this regard half yearly, in the prescribed format, to the Regional Office of the Department of Supervision in whose jurisdiction their company is registered, within a period of one month from the close of the half year.

All non-deposit taking applicable NBFCs with asset size of ₹1000 crore and above may also participate in the interest rate futures market permitted on recognized stock exchanges as trading members, subject to adherence to instructions contained in Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019 dated June 26, 2019, as amended from time to time.

Finance for Housing Projects - Incorporating clause in the terms and conditions to disclose in pamphlets / brochures / advertisements, information regarding mortgage of property to the applicable NBFC

While granting finance to housing/ development projects, applicable NBFC shall also stipulate as a part of the terms and conditions that:

the builder/ developer/ owner/ company shall disclose in the Pamphlets/ Brochures/ advertisements etc., the name(s) of the entity to which the property is mortgaged.

the builder/ developer/ owner/ company shall indicate in the pamphlets/ brochures, that they would provide No Objection Certificate (NOC)/ permission of the mortgagee entity for sale of flats/ property, if required.

Applicable NBFCs shall ensure compliance with the above stipulations and funds shall not be released unless the builder/ developer/ owner/ company fulfil the above requirements.

Loan facilities to the physically/ visually challenged by applicable NBFCs Applicable NBFCs shall not discriminate in extending products and facilities including loan facilities to physically/ visually challenged applicants on grounds of disability. All branches of applicable NBFCs shall render all possible assistance to such persons for availing of the various business facilities. Applicable NBFCs shall include a suitable module containing the rights of persons with disabilities guaranteed to them by the law and international conventions, in all the training programmes conducted for their employees at all levels. Further, applicable NBFCs shall ensure redressal of grievances of persons with disabilities under the Grievance Redressal Mechanism already set up by them.

Participation in Currency Futures

Applicable NBFCs shall participate in the designated currency futures exchanges recognized by SEBI as clients, subject to Bank’s (Foreign Exchange Department) guidelines in the matter, only for the purpose of hedging their underlying forex exposures. Disclosures shall be made in the balance sheet relating to transactions undertaken in the currency futures market, in accordance with the guidelines issued by SEBI.

95. Entry into insurance business

For entry into insurance business applicable NBFCs shall make an application along with necessary particulars duly certified by their statutory auditors to the Regional Office of Department of Supervision under whose jurisdiction the registered office of the applicable NBFCs is situated.

Applicable NBFCs shall take up insurance agency business on fee basis and without risk participation, without the approval of the Bank subject to the certain eligibility conditions.

The Detailed Guidelines are as provided for in Annex XVIII.

96. Issue of Credit Card

Applicable NBFCs registered with the Bank shall not undertake credit card business without prior approval of the Bank. Any company including a non-deposit taking company intending to engage in this activity requires a Certificate of Registration, apart from specific permission to enter into this business, the pre-requisite for which is a minimum net owned fund of ₹100 crore and subject to such terms and conditions as the Bank may specify in this behalf from time to time. Applicable NBFCs shall not issue debit cards, smart cards, stored value cards, charge cards, etc. Applicable NBFCs shall comply with the instructions issued by Bank to commercial banks vide DBOD.FSD.BC.49/24.01.011/2005-06 dated November 21, 2005 and as amended from time to time.

97. Issue of Co-branded Credit Cards

Applicable NBFCs registered with the Bank are allowed selectively to issue co-branded credit cards with scheduled commercial banks, without risk sharing, with prior approval of the Bank, for an initial period of two years and a review thereafter. Applicable NBFCs fulfilling the minimum eligibility requirements and adhering to certain stipulations are eligible to apply. The eligibility requirements are as stipulated

in Annex XIX.

98. Distribution of Mutual Fund (MF) products

Applicable NBFCs registered with the Bank shall distribute mutual fund products subject to compliance with the SEBI guidelines/ regulations, including its code of conduct, for distribution of mutual fund products. The detailed guidelines are as provided in Annex XX.

99. Applicable NBFCs not to be partners in partnership firms

No applicable NBFC shall contribute to the capital of a partnership firm or become a partner of such firm.

In this connection

Partnership firms shall also include Limited Liability Partnerships (LLPs);

The aforesaid prohibition shall also be applicable in respect of Association of persons, these being similar in nature to partnership firms.

Applicable NBFCs which had already contributed to the capital of a partnership firm/ LLP/ Association of persons or are a partner of a partnership firm/ LLP or member of an Association of persons shall seek early retirement from the partnership firm/ LLP/ Association of persons.

Submission of data to Credit Information Companies (CICs) - Format of data to be submitted by Credit Institutions

(1) All applicable NBFCs (other than those which are purely into investment activities without any customer interface) shall become member of all CICs and submit data (including historical data) to them.

(2) In terms of sub-sections (1) and (2) of section 17 of the Credit Information Companies (Regulation) Act, 2005, a credit information company may require its members to furnish credit information as it may deem necessary in accordance with the provisions of the Credit Information Companies (Regulation) Act, 2005 and every such credit institution has to provide the required information to that credit information company. In terms of Regulation 10(a)(ii) of the Credit Information Companies Regulations, 2006, every credit institution shall:

keep the credit information maintained by it, updated regularly on a monthly basis or at such shorter intervals as mutually agreed upon between the credit institution and the credit information company; and

take all such steps which may be necessary to ensure that the credit information furnished by it, is update, accurate and complete.

Data Format for Furnishing of Credit Information to Credit Information Companies and other Regulatory Measures

All applicable NBFCs shall comply with the instructions contained in the Bank’s circular DBOD.No.CID.BC.127/20.16.056/2013-14 dated June 27, 2014 and as amended from time to time; laying down instructions regarding the following:

Creating Awareness about Credit Information Report (CIR);

Usage of CIR in all Lending Decisions and Account Opening;

Populating Commercial Data Records in Databases of all CICs;

Standardisation of Data Format;

Constitution of a Technical Working Group;

Process of Rectification of Rejected Data;

Determining Data Quality Index;

Calibration of Credit Score and Standardising Format of CIR;

Best practices for Banks/ FIs.

Applicable NBFCs shall comply with the provisions contained in the circular DoR.FIN.REC.59/20.16.056/2021-22 dated October 14, 2021 on ‘Data Format for Furnishing of Credit Information to Credit Information Companies’.

Applicable NBFCs shall comply with the directive issued under CICRA Sec 11(1) by the Bank vide DBR.No.CID.BC.59/20.16.056/2014-15 dated January 15, 2015.

102. Implementation of Green Initiative of the Government

All Applicable NBFCs shall take proactive steps for increasing the use of electronic payment systems, elimination of post-dated cheques and gradual phase-out of cheques in their day-to-day business transactions which would result in more cost-effective transactions and faster and accurate settlements.

103. Attempt to defraud using fake bank guarantee: Modus Operandi

Instances of fraud have been brought to the notice of the RBI wherein Bank Guarantees (BGs) purportedly issued by a couple of bank branches in favour of different entities were presented for confirmation by other commercial banks / individuals representing some beneficiary firms. The BGs were submitted along with Confirmation Advice/ Advice of Acceptance. One of the beneficiaries was the reporting banks customer. The remaining beneficiaries and applicants were neither the customers of the bank nor were they known to the bank branch officials.

A scrutiny of the said BG revealed that these bank guarantees were fake and the signatures of the bank officials appearing on the BG were forged. The bank branches purported to have issued the BGs also confirmed that they had not issued the same. Even the format of the BGs and their serial numbers did not match with that of the bank.

Applicable NBFCs shall take notice of the above facts in order to exercise due caution while handling such cases.

104. Credit Default Swaps – Applicable NBFCs as Users

Applicable NBFCs shall only participate in CDS market as users. As users, they shall buy credit protection only to hedge their credit risk on corporate bonds they hold. They shall not sell protection and hence shall not enter into short positions in

the CDS contracts. They shall exit their bought CDS positions by unwinding them with the original counterparty or by assigning them in favour of buyer of the underlying bond.

Apart from complying with all the provisions above, applicable NBFCs shall, as users, also ensure that the guidelines enclosed including operational requirements for CDS as provided in Annex XXI, are fulfilled by them.

Securitisation of Standard Assets and Transfer of Loan Exposures Applicable NBFCs shall ensure compliance with the instructions contained in Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 and Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021, both dated September 24, 2021.

Deleted

Raising Money through Private Placement by applicable NBFCs-Debentures etc.

Applicable NBFCs shall follow the guidelines on private placement of Non-Convertible Debentures (NCDs) given in Annex XXIII. The provisions of Companies Act, 2013 and Rules framed thereunder shall be applicable wherever not contradictory.

Filing of records of mortgages with the Central Registry

Applicable NBFCs shall file and register the records of equitable mortgages created in their favour on or after March 31, 2011 with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) and shall also register the records with the Central Registry as and when equitable mortgages are created in their favour. Applicable NBFCs shall register all types of mortgages with CERSAI.

109. Non-co-operative borrowers

All Notified NBFCs shall identify "non-co-operative borrowers". A "non-co-operative borrower" is defined as one who does not provide necessary information required by a lender to assess its financial health even after two reminders; or denies access to securities etc. as per terms of sanction or does not comply with other

terms of loan agreements within stipulated period; or is hostile/ indifferent/ in denial mode to negotiate with the NBFC on repayment issues; or plays for time by giving false impression that some solution is on horizon; or resorts to vexatious tactics such as litigation to thwart timely resolution of the interest of the lender/s. The borrowers shall be given 30 days' notice to clarify their stand before their names are reported as non-cooperative borrowers.

With a view to discouraging borrowers/ defaulters from being unreasonable and non-cooperative with lenders in their bonafide resolution/ recovery efforts, NBFCs shall classify such borrowers as non-co-operative borrowers, after giving them due notice, if satisfactory clarifications are not furnished. Notified NBFCs shall be required to report classification of such borrowers to CRILC. Further, NBFCs shall be required to make higher/ accelerated provisioning in respect of new loans/ exposures to such borrowers as also new loans/ exposures to any other company promoted by such promoters/ directors or to a company on whose board any of the promoter/ directors of this non-cooperative borrower is a director. The provisioning applicable in such cases shall be at the rate of 5 per cent, if it is a standard account and accelerated provisioning, if it is an NPA. This is a prudential measure since the expected losses on exposures to such non-cooperative borrowers are likely to be higher.

110. Rounding off transactions to the Nearest Rupee by applicable NBFCs

All transactions of applicable NBFCs, including payment of interest on deposits/ charging of interest on advances, shall be rounded off to the nearest rupee, i.e. fractions of 50 paise and above shall be rounded off to the next higher rupee and fractions of less than 50 paise shall be ignored. It shall be ensured that cheques/ drafts issued by clients containing fractions of a rupee shall not be rejected by them.

Appointment of Non-Deposit Accepting applicable NBFCs as sub-agents under Money Transfer Service Schemes (MTSS)

Non-deposit accepting applicable NBFCs may act as sub-agents under MTSS without any prior approval of the Bank. Deposit accepting NBFCs shall not undertake such activity.

112. Provision of Safe Deposit Locker Facility by applicable NBFCs

Providing safe deposit locker facility is a fee-based service and shall not be reckoned as part of the financial business carried out by applicable NBFCs. Applicable NBFCs offering safe deposit locker facility or intending to offer it, shall disclose to their customers that the activity is not regulated by the Bank.

Point of Presence (PoP) Services under Pension Fund Regulatory and Development Authority for National Pension System (NPS)

Applicable NBFCs with asset size of ₹500 crore and above which comply with the prescribed CRAR and made net profit in the preceding financial year be permitted to undertake PoP services under PFRDA for NPS after registration with PFRDA. Eligible NBFCs extending such services shall ensure that the NPS subscription collected by them from the public is deposited on the day of collection itself (T+0 basis; where T is the date of receipt of clear funds, either by cash or any other mode) with the Trustee Bank. The deposits shall be made in the Trustee Bank account opened for this purpose under the regulations framed by PFRDA for NPS. NBFCs conducting PoP services shall strictly adhere to the guidelines framed by PFRDA. Any violation of the instructions above would invite supervisory action, including but not limited to cancellation of permission to undertake PoP services.

Criteria for deciding NBFC-ND-SI status

Once an NBFC reaches an asset size of ₹500 crore or above, it shall be subject to the regulatory requirements as per these Directions, despite not having such assets as on the date of last balance sheet. All such non-deposit taking NBFCs shall comply with the regulations/directions issued to NBFC-ND-SI from time to time, as and when they attain an asset size of ₹500 crore, irrespective of the date on which such size is attained.

In a dynamic environment, the asset size of a company can fall below ₹500 crore in a given month, which may be due to temporary fluctuations and not due to actual downsizing. In such a case the company shall continue to meet the reporting requirements and shall comply with the extant directions as applicable to NBFC-ND-SI, till the submission of its next audited balance sheet to the Bank and a specific dispensation from the Bank in this regard.

Need for public notice before Closure of the Branch/ Office by applicable

NBFC

Applicable NBFCs shall give at least three months public notice prior to the date of closure of any of its branches/ offices in, at least, one leading national newspaper and a leading local (covering the place of branch/ office) vernacular newspaper indicating therein the purpose and arrangements being made to service the depositors, etc.

Migration of Post-dated cheques (PDC)/ Equated Monthly Instalment (EMI) Cheques to Electronic Clearing Service (Debit)

Considering the protection available under section 25 of the Payment and Settlement Systems Act, 2007 which accords the same rights and remedies to the payee (beneficiary) against dishonour of electronic funds transfer instructions on grounds of insufficiency of funds as are available under section 138 of the Negotiable Instruments Act, 1881, there shall be no need for applicable NBFCs to take additional cheques, if any, from customers in addition to ECS (Debit) mandates. Cheques complying with CTS-2010 standard formats alone shall be obtained in locations, where the facility of ECS/RECS is not available.

Deleted

Guidelines for Relief Measures by NBFCs in areas affected by Natural Calamities

The Bank has issued guidelines to banks in regard to matters relating to relief measures to be provided in areas affected by natural calamities vide Master Direction – Reserve Bank of India (Relief Measures by Banks in Areas affected by Natural Calamities) Directions 2018 – SCBs dated October 17, 2018. These guidelines shall be mutatis mutandis, applicable, to NBFCs, in areas affected by natural calamities as identified for implementation of suitable relief measures by the institutional framework viz., District Consultative Committee/ State Level Bankers' Committee.

119. Disbursal of loan amount in cash

Every NBFC shall ensure compliance with the requirements under sections 269SS

and 269T of the Income Tax Act, 1961, as amended from time to time.

Managing Risks and Code of Conduct in Outsourcing of Financial Services by NBFCs.

NBFCs shall conduct a self-assessment of their existing outsourcing arrangements and bring these in line with the directions as provided at Annex XXV.

120A. Loans Sourced by NBFCs over Digital Lending Platforms: Adherence to Fair Practices Code and Outsourcing Guidelines

Many digital platforms have emerged in the financial sector claiming to offer hassle free loans to retail individuals, small traders, and other borrowers. NBFCs are also seen to be engaging digital platforms to provide loans to their customers. In addition, some NBFCs have been registered with Reserve Bank as ‘digital-only’ lending entities while some NBFCs are registered to work both on digital and brick-mortar channels of credit delivery. Thus, NBFCs are observed to lend either directly through their own digital platforms or through a digital lending platform under an outsourcing arrangement. Such digital platforms, on several occasions tend to portray themselves as lenders without disclosing the name of the NBFC at the backend, as a consequence of which, customers are not able to access grievance redressal avenues available under the regulatory framework. Of late, there are several complaints against the lending platforms which primarily relate to exorbitant interest rates, non-transparent methods to calculate interest, harsh recovery measures, unauthorised use of personal data and bad behaviour.

Although digital delivery in credit intermediation is a welcome development, concerns emanate from non-transparency of transactions and violation of extant guidelines on outsourcing of financial services and Fair Practices Code, etc. issued to NBFCs. It is, therefore, reiterated that NBFCs, irrespective of whether they lend through their own digital lending platform or through an outsourced lending platform, must adhere to the Fair Practices Code guidelines in letter and spirit. They must also meticulously follow regulatory instructions on outsourcing of financial services and IT services.

(3) It must be noted that outsourcing of any activity by NBFCs does not diminish their obligations, as the onus of compliance with regulatory instructions rests solely with them. Wherever NBFCs engage digital lending platforms as their agents to source borrowers and/ or to recover dues, they must follow the following instructions:

Names of digital lending platforms engaged as agents shall be disclosed on the website of NBFCs.

Digital lending platforms engaged as agents shall be directed to disclose upfront to the customer, the name of the NBFC on whose behalf they are interacting with him.

Immediately after sanction but before execution of the loan agreement, the sanction letter shall be issued to the borrower on the letter head of the NBFC concerned.

d) A copy of the loan agreement along with a copy each of all enclosures quoted in the loan agreement shall be furnished to all borrowers at the time of sanction/ disbursement of loans.

e) Effective oversight and monitoring shall be ensured over the digital lending platforms engaged by the NBFCs.

f) Adequate efforts shall be made towards creation of awareness about the grievance redressal mechanism.

Any violation in this regard by NBFCs (including NBFCs registered to operate on ‘digital-only’ or on digital and brick-mortar channels of delivery of credit) will be viewed seriously.

121. Licensing as Authorised Dealer- Category II

In order to increase the accessibility and efficiency of forex services extended to the members of the public for their day-to-day non-trade current account transactions, Systemically Important Non-Deposit taking Investment and Credit Companies shall be eligible for Authorized Dealer- Category II (AD- Cat II) licence, subject to meeting the following conditions:

NBFCs offering such services shall have a ‘minimum investment grade

rating’.

NBFCs offering such services shall put in place a board approved policy on

managing the risks, including currency risk, if any, arising out of such

activities and (b) handling customer grievances arising out of such activities. A monitoring mechanism, at least at monthly intervals, shall be put in place for such services.

The eligible NBFCs desirous of undertaking AD-Cat II activities shall approach the Reserve Bank of India, Foreign Exchange Department, Central Office, Mumbai for the AD-Cat II licence.

Technical Specifications for all participants of the Account Aggregator ecosystem

The NBFC-Account Aggregator (AA) consolidates financial information, as defined in para 3(1)(ix) of Master Direction- Non-Banking Financial Company - Account Aggregator (Reserve Bank) Directions, 2016, of a customer held with different financial entities, spread across financial sector regulators adopting different IT systems and interfaces. In order to ensure that such movement of data is secured, duly authorised, smooth and seamless, it has been decided to put in place a set of core technical specifications for the participants of the AA ecosystem. Reserve Bank Information Technology Private Limited (ReBIT), has framed these specifications and published the same on its website (www.rebit.org.in).

Applicable NBFCs acting either as Financial Information Providers (FIP)13 or Financial Information Users (FIU) are expected to adopt the technical specifications published by ReBIT, as updated from time to time.

Chapter - XIV

Reporting Requirements

The reporting requirements as prescribed by Department of Supervision shall be adhered to by all applicable NBFCs.

Chapter – XV

Interpretations

For the purpose of giving effect to the provisions of these Directions, the Bank may, if it considers necessary, issue necessary clarifications in respect of any matter covered herein and the interpretation of any provision of these Directions given by

The definitions of FIP and FIU are as per the Master Direction- Non-Banking Financial Company - Account Aggregator (Reserve Bank) Directions, 2016, as amended from time to time.

the Bank shall be final and binding on all the parties concerned. Violation of these directions shall invite penal action under the provisions of Act. Further, these provisions shall be in addition to, and not in derogation of the provisions of any other laws, rules, regulations or directions, for the time being in force.

Chapter - XVI

Repeal Provisions

With the issue of the directions, the instructions / guidelines contained in the following circulars issued by the Bank stand repealed (list as provided below).All approvals / acknowledgements given under these circulars shall be deemed as given under these directions. Notwithstanding such repeal, any action taken/purported to have been taken or initiated under the instructions/guidelines having repealed shall continue to be guided by the provisions of said instructions/guidelines.

Sr.Circular No.DateSubject

No.

1 Notification

December 18,NBFC Prudential Norms (Reserve Bank)

No.DNBS.128/CGM(V

1998Directions, 1998

SNM)-98

2 DNBS.(PD)

.CC.No.11/

November 15, Amendments to NBFC Regulations

02.01/99-2000

1999

3 Notification No. January 13, NBFC Prudential Norms (Reserve Bank)

DNBS.135/CGM(VSN2000Directions, 1998

M)-2000

4 Notification June 30, 2000 NBFC Prudential Norms (Reserve Bank)

DNBS.142/CGM(VSNDirections, 1998

M)-2000

5 DNBS(PD).CC.No.15/0

June 27, 2001 Asset Liability Management (ALM)

2.01/2000-2001

System for NBFCs - Guidelines

6 DNBS.(PD).CC.No.16/

June 27, 2001 Amendments to NBFC Regulations

02.01/2000-01

7 DNBS

(PD)

C.C.

February 10, Entry of NBFCs into Insurance Business

No.35/10.24/2003-04

2004

8 DNBS (PD) CC No.

June 11, 2004 Transactions in Government Securities

/02.02/2003-04

9 DNBS

(PD)

C.C.

July 7, 2004Issue of credit card

No.41/10.27/2004-05

10 DNBS (PD) CC No.49

June 9, 2005 Operative instructions relating to

/02.02/2004-05

relaxation/modification in Ready Forward

Contracts,Settlement ofGovernment

Securities Transactions and Sale of

securities allotted in Primary Issues

11 DNBS.(PD).C.C.No.63/

January 24, Prior Public Notice About Change in

02.02/2005-06

2006Control / Management

12 DNBS

(PD)

September 28, Guidelines on Fair Practices Code for

No.80/03.10.042/2005-

2006 Non-Banking Financial Companies

Sr.Circular No.DateSubject

No.

13 DNBS (PD) CC No.82/

October 27,Prior Public Notice about change in

03.02.02/2006-07

2006control / management

14 DNBS

(PD)

No.

December 04,Issue of Co-branded Credit Cards

83/03.10.27/2006-07

2006

15 DNBS

(PD)

No.

December 04,Distribution of Mutual Fund products by

84/03.10.27/2006-07

2006NBFCs

16 DNBS.PD/CC.

December 12,Financial Regulationof Systemically

No.86/03.02.089/2006-

2006ImportantNBFCsandBanks’

Relationship with them – for NBFCs’

17 DNBS.PD/CC.No.

February 22,Prudential Norms Directions – Deposit

89/03.05.002/2006

-07

2007taking and Non-deposit taking Non-

Banking Financial Companies (NBFCs)

18 DNBS.PD/CC.No.95/0

May 24, 2007Complaintsaboutexcessiveinterest

3.05.002/2006-07

charged by NBFCs

19 DNBS.PD/C.C.No.96/

July 31, 2007NBFCs - FIMMDA Reporting Platform for

03.10.001/2007-08

Corporate Bond Transactions

20 DNBS.PD/CC.104/03.1

July 11, 2007Guidelines on Corporate Governance

0.042/2007-08

21 DNBS.PD/CC.No.107/

October 10,Guidelines on Fair Practices Code for

03.10.042/2007-08

2007Non-Banking Financial Companies

22 DNBS.PD/C.C

November 26,Unsolicited Commercial Communications

No.109/03.10.001/2007

2007- National Do Not Call Registry

-08

23 DNBS

(PD)

C.C.No.

July 31, 2008Accounting for taxes on income-

124/03.05.002/2008-09

Accounting Standard 22- Treatment of

deferred tax assets (DTA) and deferred

tax liabilities (DTL) for computation of

capital

24 DNBS

(PD).CC.

August 1, 2008 Guidelines for NBFC-ND-SI as regards

No.125/03.05.002/2008

capital adequacy, liquidity and disclosure

-2009

norms

25 DNBS.PD.CC No.128 /

September 15,Reclassification of NBFCs

03.02.059/2008-09

2008

26 DNBS

(PD).

October 29,Enhancement of NBFCs’ capital raising

CC.131/03.05.002/200

2008option for capital adequacy purposes

8-09

27 DNBS

(PD)

January 2,Regulation of excessive interest charged

C.C.No.133/03.10.001/

2009by NBFCs

2008-09

28 DNBS

(PD)

CC.

February 04,Ratings of NBFCs

No.134/03.10.001/2008

2009

-2009

29 DNBS

(PD)

April 24, 2009Clarificationregardingrepossessionof

CC.No.139/03.10.001/

vehicles financed by NBFCs

2008-09

30 DNBS

(PD)

CC.

June 04, 2009Applicability of NBFCs-ND-SI regulations

No.141/03.10.001/2008

-09

31 DNBS.PD/CC.No.142/

June 09, 2009NBFCs - Treatment of Deferred Tax

03.05.002/2008-09

Assets/DeferredTaxLiabilitiesfor

Computation of Capital

Sr.Circular No.DateSubject

No.

32 DNBS.PD.CC.No.161/

September 18,Introduction of Interest Rate Futures-

3.10.01/2009-10

2009NBFCs

33 DNBS.PD/CC.No.165/

December 01,Capital Adequacy - Risk weightage on

03.05.002/2009-10

2009Lending through Collateralized Borrowing

and Lending Obligation (CBLO)

34 DNBS.PD.CC

February 12,Infrastructure Finance Companies

No.168/03.02.089

2010

/2009-10

35 DNBS

(PD).CC.

May 03, 2010Overseas Investment by NBFCs- No

No.173/03.10.01

Objection (NoC) from DNBS, RBI

/2009-10

36 DNBS

(PD)

C.C

No.

May 06, 2010Finance for Housing Projects –

174/03.10.001/2009-10

Incorporating clause in the terms and

conditionstodisclosein

pamphlets/brochures/advertisements,

informationregardingmortgageof

property to the NBFC

37 DNBS.CC.PD.No.

July 27, 2010Loan facilities to the physically / visually

191/03.10.01/2010

-11

challenged by NBFCs

38 DNBS

(PD)

No.

August 09,Participation in Currency Futures

195/03.10.001/2010-11

2010

39 DNBS.PD/CC.

August 11,Ready Forward Contracts in Corporate

No.196/03.05.002/2010

2010Debt Securities

-11

40 DNBS

(PD)

September 16,Participation in Currency Options

No.199/03.10.001/2010

2010

-11

41 DNBS.(PD).CC.No.

September 17,Submission of data to Credit Information

200/03.10.001/2010

-11

2010Companies Format of data to be

submitted by Credit Institutions

42 Notification

January 5,Non-Banking Financial (Non-Deposit

No.DNBS.(PD).219/CG

2011AcceptingorHolding)Companies

M(US)-2011

PrudentialNorms(Reserve Bank)

Directions, 2007

43 DNBS.CC.PD.No.208/

January 27,Services to Persons with Disability -

03.10.01/2010-11

2011Training Programme for Employees

44 DNBS

(PD)

CC.

March 16, 2011 Amendment to Definition of Infrastructure

No.213/03.10.001/2010

Loan

-2011

45 DNBS.PD/CC.NO.

March 30, 2011NBFCs not to be Partners in Partnership

214/03.02.002/2010

-11

firms

46 DNBS.PD.CC.No.221/

May 27, 2011Review of Guidelines on entry of NBFCs

03.02.002/2010-11

into Insurance Business

47 DNBS

(PD)

CC.No.

June 14, 2011OpeningofBranch/Subsidiary/Joint

222/03.10.001/2010-11

Venture/RepresentativeOfficeor

UndertakingInvestmentAbroadby

NBFCs

48 DNBS(PD).CC.

September 27,Attempt to defraud using fake bank

No.245/03.10.42

2011guarantee-modus operandi

/2011-12

Sr. Circular No. Date Subject

No.

49 DNBS(PD).CC.No

October 28,Implementation of Green Initiative of the

248/03.10.01/2011

-12

2011Government

50 DNBS.PD.CC.No.249/

November 21, NBFCs - Infrastructure Debt Funds

03.02.089/2011-12

2011

51 DNBS.CC.PD.No.

December 02,Introduction of New Category of NBFCs -

250/03.10.01/2011

-12

2011‘Non Banking Financial Company-Micro

Finance Institutions’ (NBFC-MFIs) -

Directions

52 DNBS.CC.PD.No.252/

December 26, Revised Capital Adequacy Framework for

03.10.01/2011-12

2011Off-Balance Sheet Items for NBFCs

53 DNBS.CC.PD.No.253/

December 26, Credit Default Swaps – NBFCs as Users

03.10.01/2011-12

2011

54 DNBS.CC.PD.No.254/

December 30,Revised Capital Adequacy Framework for

03.10.01/2011-12

2011Off-Balance Sheet Items for NBFCs-

Clarification

55 DNBS.CC.PD.No.255/

December 30, Issuance of Non-Convertible Debentures

03.10.01/2011-12

2011(NCDs)

56 DNBS

(PD)CC.No.259

March 15, 2012 Non- Reckoning Fixed Deposits with

/03.02.59/2011-12

Banks as Financial Assets

57 DNBS.PD/

March 20, 2012Non Banking Financial Company-Micro

Finance Institutions (NBFC-MFIs) -

CC.No.263/03.10.038

/2011-12

Provisioning Norms- Extension of time

58 DNBS.CC.PD.No.265/

March 21, 2012 NBFCs - Lending Against Security of

03.10.01/2011-12

Single Product – Gold Jewellery

59 DNBS.CC.PD.No266/0

March 26, 2012 Guidelines on Fair Practices Code for

3.10.01/2011-12

NBFCs

60 DNBS.PD.CC.No.273/

May 11, 2012 Prudential Norms Directions, 2007 -

03.10.01/2011-12

Infrastructure Finance Companies -

Eligible Credit Rating Agencies -

Brickwork Ratings India Pvt. Ltd.

(Brickwork)

61 DNBS.PD.CC.No.276/

May 30, 2012 Uniformity in Risk weight for Assets

03.02.089/2011-12

Covering PPP and Post COD Projects

62 DNBS(PD)CC.No.297/

July 23, 2012 The Non-Banking Financial Company –

Factor/22.10.91/2012-

Factors (Reserve Bank) Directions, 2012

63 Notification

August 1, 2012Revised Capital Adequacy Framework for

No.DNBS(PD)

.248/CG

Off-Balance sheet items for NBFCs -

M(US)-2012

Clarifications

64 Notification

August 1, 2012Revised Capital Adequacy Framework for

No.DNBS(PD)

.249/CG

Off-Balance sheet items for NBFCs -

M(US)-2012

Clarifications

65 DNBS

(PD)

August 03, Non Banking Financial Company-Micro

CC.No.300/03.10.038/

2012 Finance Institutions (NBFC-MFIs) –

2012-13

Directions – Modifications

66 DNBS.PD.No.

August 21,Revisions to the Guidelines on

301/3.10.01/2012

-13

2012Securitisation Transactions

67 DNBS

(PD)

CC.

September 14, The Non-Banking Financial Company –

No.303/Factor/

2012Factors (Reserve Bank) Directions, 2012

22.10.91/2012-13

Sr.Circular No.DateSubject

No.

68 DNBS.PD/CC.NO.308/

November 6,Standardisationand Enhancement of

03.10.001/2012-13

2012Security Features in Cheque Forms -

Migrating to CTS 2010 Standards

69 DNBS(Inf.).CC.No

November 08,Readiness of major service providers to

309/24.01.022/2012

-13

2012migrate from IPv4 to IPv6

70 DNBS.PD.CC.No.

December 28,Definition of 'Infrastructure Loan' of

317/03.10.001/2012

-13

2012NBFCs - Harmonisation

71 DNBS.CC.PD.No.320/

February 18,Guidelines on Fair Practices Code for

03.10.01/2012-13

2013NBFCs–GrievanceRedressal

Mechanism - Nodal Officer

72 DNBS.CC.PD.No.326/

May 27, 2013NBFCs finance for Purchase of Gold

03.10.01/2012-13

73 DNBS.(PD).CC.No.327

May 31, 2013‘Non Banking Financial Company-Micro

/03.10.038/2012-13

Finance Institutions’ (NBFC-MFIs) –

Directions – Modifications in Pricing of

Credit - Margin cap

74 DNBS.PD/CC.No.

June 11, 2013NBFCs not to be Partners in Partnership

328/03.02.002/2012

-13

Firms - Clarifications

75 DNBS

(PD) CC No.

July 26, 2013Unsolicited Commercial Communication-

353/

03.10.042/2013-

National Do Not Call Registry

76 DNBS.PD.CC.No.354/

August 2, 2013Financing of Infrastructure - Definition of

03.10.001/2013-14

'Infrastructure Lending'

77 DNBS.CC.PD.No.356

September 16,Lending Against Security of Single

/03.10.01/2013-14

2013Product – Gold Jewellery

78 DNBS.PD/CC.No

November 06,Migration of Post-dated cheques

359/03.10.001/2013

-14

2013(PDC)/Equated Monthly Installment (EMI)

Cheques to Electronic Clearing Service

(Debit)

79 DNBS.(PD).CC.No

November 12,Filing of records of equitable mortgages

360/03.10.001/2013

-14

2013with the Central Registry

80 DNBS.PD.CC.No

November 28,Participation of NBFCs in Insurance

361/03.02.002/2013

-14

2013sector

81 DNBS.PD.CC.No.

November 29,Financing of Infrastructure - Definition of

362/03.10.001/2013

-14

2013'Infrastructure Lending'

82 DNBS.PD.363/03.10.3

January 1,Advances guaranteed by Credit Risk

8/2013-14

2014Guarantee Fund Trust for Low Income

Housing (CRGFTLIH) – Risk Weights and

Provisioning

83 DNBS.CC.PD.No.

January 08,Lending Against Security of Single

365/03.10.01/2013

-14

2014Product – Gold Jewellery

84 DNBS.CO.PD.No.

January 23,Review of Guidelines on Restructuring of

367/03.10.01/2013

-14

2014Advances by NBFCs

85 DNBS

(PD)

February 07,‘Non-Banking Financial Company-Micro

CC.No.369/03.10.038/

2014Finance Institutions’ (NBFC-MFIs) –

2012-13

Directions – Modifications in “Pricing of

Credit”

Sr.Circular No.DateSubject

No.

86 DNBS

(PD)

March 21, 2014 Early Recognition of Financial Distress,

CC.No.371/03.05.02/2

Prompt Steps for Resolution and Fair

013-14

Recovery for Lenders: Framework for

Revitalising Distressed Assets in the

Economy

87 DNBS.PD.No.

March 24, 2014Revision to the Guidelines on

372/3.10.01/2013

-14

Securitisation Transactions - Reset of

Credit Enhancement

88 DNBS

(PD)

April 7, 2014InvestmentthroughAlternative

CC.No.373/03.10.01/2

Investment Funds – Clarification on

013-14

Calculation of NOF of an NBFC

89 DNBS

(PD).CC.No.

April 07, 2014Registration of Non-Operative Financial

374/03.10.001/2013-14

Holding Companies (NOFHCs)

90 DNBS

(PD)

May 26, 2014Requirement for obtaining prior approval

CC.No.376/03.10.001/

of RBI in cases of acquisition/ transfer of

2013-14

control of NBFCs

91 DNBS.CC.PD.No.377/

May 27, 2014Rounding off transactions to the Nearest

03.10.01/2013-14

Rupee by NBFCs

92 DNBS(PD).CC.No.399/

July 14, 2014Levy of foreclosure charges/pre-payment

03.10.42/2014-15

penalty on Floating Rate Loans

93 DNBS.CC.PD.No.

August 12,Appointment of Non-Deposit Accepting

405/03.10.01/2014

-15

2014NBFCs with asset size of ` 100 crore and

above as sub - agents under Money

Transfer Service Schemes (MTSS)

94 DNBS.CC.PD.No.406/

August 12,Interest Rate Futures - NBFCs

03.10.01/2014-15

2014

95 DNBS

(PD)

.CC.No

August 20,Data Format for Furnishing of Credit

407/03.10.42 /2014-15

2014InformationtoCreditInformation

Companies (CICs) and other Regulatory

Measures

96 DNBS

(PD).CC.No.

August 21,NBFCs- Lending against Shares

408/03.10.001/2014-15

2014

97 DNBR

(PD)

CC.

November 10,Revised Regulatory Framework for NBFC

No.002/03.10.001/2014

2014

-15

98 DNBR

(PD)

CC.No.

November 10,Review of the Non-Banking Financial

003/22.10.91/2014-15

2014Company – Factors (Reserve Bank)

Directions, 2012

99 DNBR.CO.PD.No.011/

January 16,Review of Guidelines on Restructuring of

03.10.01/2014-15

2015Advances by NBFCs

100 DNBR.(PD).CC.No.015

January 28,Submission of Data to Credit Information

/03.10.001/2014-15

2015Companies - Format of Data to be

submitted by Credit Institutions

101 DNBR.(PD).CC.No.019

February 06,MembershipofCreditInformation

/03.10.001/2014-15

2015Companies (CICs)

102 DNBR

(PD)

February 20,RaisingMoneythroughPrivate

No.021/03.10.001/2014

2015PlacementofNon-Convertible

-15

Debentures (NCDs) by NBFCs

103 DNBR.009/CGM(CDS)

March 27, 2015Systemically Important Non-Banking

-2015

Financial (Non-Deposit Accepting or

Holding)Companies Prudential Norms

Sr.Circular No.DateSubject

No.

(Reserve Bank) Directions, 2015

104 DNBR.011/CGM.(CDS)

March 27, 2015Non-BankingFinancial(Deposit

-2015

AcceptingorHolding)Companies

PrudentialNorms(ReserveBank)

Directions, 2007 (Amendment)

105 DNBR.012/CGM.(CDS)

March 27, 2015Non-Banking Financial Company - Factor

-2015

(Reserve Bank)Directions,2012

(Amendment)

106 DNBR.CC.PD.No.027/

April 08, 2015Non-Banking Financial Company-Micro

03.10.01/2014-15

Finance Institutions (NBFC-MFIs) –

Directions – Modifications - Annual

household income of NBFC-MFI

borrower, eligible to be defined as a

qualifying asset, raised.

107 DNBR

April 10, 2015NBFCs- Lending against Shares –

(PD)

.CC.No.028/03.10.

Clarification

001/2014-15

108 DNBR

(PD)

April 10, 2015Guidelines on Corporate Governance -

CC.No.029/ 03.10.001/

Review

2014-15

109 DNBR.(PD).CC.No.

April 30, 2015Distribution of Mutual Fund products by

033/03.10.001/2014

-15

NBFCs

110 DNBR

(PD)

May 14, 2015Infrastructure Debt Funds (IDFs)

CC.No.035/03.10.001/

2014-15

111 DNBR.CC.PD.No.036/

May 21, 2015Lending against security of single product

03.10.01/2014-15

- Gold Jewellery

112 DNBR.CC.PD.No.041/

June 25, 2015Appointment of Non-Deposit Accepting

03.10.01/2014-15

NBFCs with asset size of ` 100 crore and

above as sub- agents under Money

Transfer Service Schemes (MTSS)

113 DNBR

(PD)

CC.No.

July 02, 2015ApplicabilityofCreditConcentration

064/03.10.001/2015-16

Norms

114 DNBR

(PD)

CC.No.

July 09, 2015Requirement for obtaining prior approval

065/03.10.001/2015-16

of RBI in cases of acquisition/ transfer of

control of Non-Banking Financial

Companies (NBFCs)

115 DNBR.CC.PD.No.066/

July 23, 2015Early Recognition of Financial Distress,

03.10.01/2015-16

Prompt Steps for Resolution and Fair

Recovery for Lenders: Framework for

Revitalising Distressed Assets in the

Economy - Review of the Guidelines on

Joint Lenders' Forum (JLF) and

Corrective Action Plan (CAP)

116 DNBR.CO.PD.No.

July 30, 2015Review of Guidelines on Restructuring of

067/03.10.01/2015

-16

Advances by NBFCs

117 DNBR.CC.PD.No.

October 01,Non-Banking Financial Company-Micro

069/03.10.01/2015

-16

2015Finance Institutions (NBFC-MFIs) –

Directions – Modifications

Sr. Circular No. Date Subject

No.

118 DNBR.CC.PD.No.

October 29, Early Recognition of Financial Distress,

070/03.10.01/2015

-16

2015Prompt Steps for Resolution and Fair

Recovery for Lenders: Framework for

Revitalising Distressed Assets in the

Economy - Review of the Guidelines on

Joint Lenders' Forum (JLF) and

Corrective Action Plan (CAP)

119 DNBR.CC.PD.No.

November 26, Non-Banking Financial Company-Micro

071/03.10.038/2015

-16

2015Finance Institutions (NBFC-MFIs) –

Directions DNBS.PD.No. 234/CGM (US)-

2011 dated December 2, 2011 and

DNBR.CC.PD.No.027/03.10.01/2014-15

dated April 08, 2015 – Revision of the

loan amount with tenure not less than 24

120 DNBR(PD).CC.No.

January 28, Provision of Safe Deposit Locker facility

072/03.10.001/2015

-16

2016by NBFCs

121 DNBR

(PD)CC.No.

February 18, Undertaking of Point of Presence (PoP)

073/03.10.001/2015-16

2016Services under Pension Fund Regulatory

and Development Authority for National

Pension System (NPS)

122 DNBR.CC.PD.No.074/

February 18, NBFC – Factors (Reserve Bank)

03.10.01/2015-16

2016Directions, 2012 – Review

123 DNBR

(PD)

March 10, 2016 Review of risk weights assigned to

CC.No.076/03.10.001/

sovereign debt

2015-16

124 DNBR

(PD)

April 7, 2016 Applicability of Concentration of Credit/

CC.No.077/03.10.001/

Investment Norms

2015-16

125 DNBR.CC.PD.No.078/

April 13, 2016 Non-Banking Financial Company-Micro

03.10.038/2015-16

Finance Institutions (Reserve Bank)

Directions, 2011 – Acting as Channelizing

Agents for Schemes operated by

Central/State Government Agencies

126 DNBR(PD).CC.No.079/

April 21, 2016 Infrastructure Debt Funds (IDFs)

03.10.001/2015-16

127 DNBR.CC.PD.No.081/

May 26, 2016 Review of Framework for Revitalising

03.10.01/2015-16

Distressed Assets in the Economy and

Strategic Debt Restructuring Mechanism

128 DNBR.CC.PD.No.082/

June 2, 2016 Refinancing of Project Loans

03.10.001/2015-16

129 DNBR(PD)CC.No.083/

July 28, 2016Guidelines for Relief Measures by NBFCs

03.10.001/2016-17

in areas affected by Natural Calamities

Timeline for Government NBFCsAnnex I

NormExtant Provisions forGovt. NBFCs Timeline

other NBFCs

Prudential Regulation

Income recognition As prescribed Balance Sheet dated March 31, 2019

Asset ClassificationNBFC-NDSI andNBFC-NDSI and NBFCs-D

NBFCs-D – 90 days120 days – March 31, 2019

norm90 days – March 31, 2020

NBFCs-ND – 180 daysNBFCs-ND

norm180 day norm – March 31, 2019

Provisioning For NPAs – As As on March 31, 2019– 100% of

requirementspecified in theprescribed requirement

Directions.

For Standard Assets

NBFC-NDSIand

NBFCs-D- 0.40%

NBFCs-ND – 0.25%

Capital AdequacyCRAR – 15%

10% (min Tier I –March31,

Applicable toNDSITier I – 10%

7%;2019

and NBFC –D

12% (min Tier I –March31,

8%)2020

13% (min Tier I –March31,

9%)2021

15% (min Tier I –March31,

10%)2022

Leverage Ratio Applicable to NBFC – A roadmap for adherence by March

ND31, 2022 to be prepared by the Govt.

NBFC- ND

Concentration of As prescribed Govt. companies set up to serve

credit/ investment specific sectors may approach the

Reserve Bank for exemptions, if any.

For others, the timeline will be up to

balance Sheet dated March 31, 2022

Others

Corporate As prescribed Balance Sheet dated March 31, 2019

Governance etc.

NormExtant Provisions forGovt. NBFCs Timeline

other NBFCs

Conduct of As prescribed Balance Sheet dated March 31, 2019

Business

Regulations(Fair

Practices Code)

Acceptance of Deposit Directions

Deposit Directions As prescribed for • Investment Grade Credit rating for

NBFC-Dacceptance of public deposits-

March 31, 2019.

•AGovt.NBFC-Dhaving

investment grade credit rating can

accept deposits only upto 1.5

times of its NOF. Govt. 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.

•All other directions shall apply

from Balance Sheet dated March

31, 2019.

Statutory Provisions

Sec 45 IB Maintenance of March 31, 2019–5% of outstanding

percentage of assets –deposits

15% of the outstandingMarch 31, 2020 – 10% of outstanding

depositsdeposits

March 31, 2021 – 12% of outstanding

deposits

March 31, 2022 – 15% of outstanding

deposits

Sec 45 ICReserve FundMarch 31, 2019

Annex II

Guidelines on Liquidity Risk14 Management Framework

Non-deposit taking NBFCs with asset size of ₹100 crore and above, systemically important Core Investment Companies and all deposit taking NBFCs (except Type I NBFC-ND15, Non-Operating Financial Holding Company and Standalone Primary Dealer) shall adhere to the guidelines as mentioned herein below. It will be the responsibility of the Board to ensure that the guidelines are adhered to. The internal controls required to be put in place by NBFCs as per these guidelines shall be subject to supervisory review. Further, as a matter of prudence, all other NBFCs are also encouraged to adopt these guidelines on liquidity risk management on voluntary basis. The guidelines deal with following aspects of Liquidity Risk Management framework.

Liquidity Risk Management Policy, Strategies and Practices

Management Information System (MIS)

Internal Controls

Maturity profiling

Liquidity Risk Measurement – Stock Approach

Currency Risk

Managing Interest Rate Risk

Liquidity Risk Monitoring Tools

A. Liquidity Risk Management Policy, Strategies and Practices

In order to ensure a sound and robust liquidity risk management system, the Board of the NBFC shall frame a liquidity risk management framework which ensures that it maintains sufficient liquidity16, including a cushion of unencumbered, high quality liquid assets to withstand a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources. It shall spell out the entity-level liquidity risk tolerance; funding strategies; prudential limits; system for measuring, assessing and reporting/ reviewing liquidity; framework for stress testing;

14“Liquidity Risk” means inability of an NBFC to meet such obligations as they become due without adversely affecting the NBFC’s financial condition. Effective liquidity risk management helps ensure an NBFC’s ability to meet its obligations as and when they fall due and reduces the probability of an adverse situation developing.

Type I NBFC-ND as defined in RBI press release dated June 17, 2016.

16“Liquidity” means NBFC’s capacity to fund the increase in assets and meet both expected and unexpected cash and collateral obligations at reasonable cost and without incurring unacceptable losses.

liquidity planning under alternative scenarios/formal contingent funding plan; nature and frequency of management reporting; periodical review of assumptions used in liquidity projection; etc.

Key elements of the liquidity risk management framework are as under:

i) Governance of Liquidity Risk Management

Successful implementation of any risk management process has to emanate from the top management in the NBFC with the demonstration of its strong commitment to integrate basic operations and strategic decision-making with risk management. The Chief Risk Officer appointed by the NBFC in terms of our circular DNBR (PD)

No.099/03.10.001/2018-19 dated May 16, 2019 shall be involved in the process of identification, measurement and mitigation of liquidity risks. A desirable organisational set up for liquidity risk management should be as under:

a) Board of Directors

The Board shall have the overall responsibility for management of liquidity risk. The Board shall decide the strategy, policies and procedures of the NBFC to manage liquidity risk in accordance with the liquidity risk tolerance/ limits decided by it.

b) Risk Management Committee

The Risk Management Committee, which reports to the Board and consisting of Chief Executive Officer (CEO)/ Managing Director and heads of various risk verticals shall be responsible for evaluating the overall risks faced by the NBFC including liquidity risk.

c) Asset-Liability Management Committee (ALCO)

The ALCO consisting of the NBFC’s top management shall be responsible for ensuring adherence to the risk tolerance/ limits set by the Board as well as implementing the liquidity risk management strategy of the NBFC. The CEO/ MD or the Executive Director (ED) should head the Committee. The Chiefs of Investment, Credit, Resource Management or Planning, Funds Management/ Treasury (forex and domestic), Economic Research may be members of the Committee. The role of the ALCO with respect to liquidity risk should include, inter alia, decision on desired maturity profile and mix of incremental assets and liabilities, sale of assets as a source of funding, the structure, responsibilities and

controls for managing liquidity risk, and overseeing the liquidity positions of all branches.

d) Asset Liability Management (ALM) Support Group

The ALM Support Group consisting of the operating staff shall be responsible for analysing, monitoring and reporting the liquidity risk profile to the ALCO. Such support groups will be constituted depending on the size and complexity of liquidity risk management in an NBFC.

ii) Liquidity risk Tolerance

An NBFC shall have a sound process for identifying, measuring, monitoring and controlling liquidity risk. It should clearly articulate a liquidity risk tolerance that is appropriate for its business strategy and its role in the financial system. Senior management should develop the strategy to manage liquidity risk in accordance with such risk tolerance and ensure that the NBFC maintains sufficient liquidity.

iii) Liquidity Costs, Benefits and Risks in the Internal Pricing

NBFCs should endeavour to develop a process to quantify liquidity costs and benefits so that the same may be incorporated in the internal product pricing, performance measurement and new product approval process for all material business lines, products and activities.

iv) Off-balance Sheet Exposures and Contingent Liabilities

The process of identifying, measuring, monitoring and controlling liquidity risk should include a robust framework for comprehensively projecting cash flows arising from assets, liabilities and off-balance sheet items over an appropriate set of time horizons. The management of liquidity risks relating to certain off-balance sheet exposures on account of special purpose vehicles, financial derivatives and guarantees and commitments may be given particular importance due to the difficulties that many NBFCs have in assessing the related liquidity risks that could materialise in times of stress.

v) Funding Strategy - Diversified Funding

An NBFC shall establish a funding strategy that provides effective diversification in the sources and tenor of funding. It should maintain an ongoing presence in its chosen funding markets and strong relationships with fund providers to promote

effective diversification of funding sources. An NBFC should regularly gauge its capacity to raise funds quickly from each source. There should not be over-reliance on a single source of funding. Funding strategy should also take into account the qualitative dimension of the concentrated behaviour of deposit withdrawal (for deposit taking NBFCs) in typical market conditions and over-reliance on other funding sources arising out of unique business model.

vi) Collateral Position Management

An NBFC shall actively manage its collateral positions, differentiating between encumbered and unencumbered assets. It should monitor the legal entity and physical location where collateral is held and how it may be mobilised in a timely manner. Further, an NBFC should have sufficient collateral to meet expected and unexpected borrowing needs and potential increases in margin requirements over different timeframes.

vii) Stress Testing

Stress testing shall form an integral part of the overall governance and liquidity risk management culture in NBFCs. An NBFC should conduct stress tests on a regular basis for a variety of short-term and protracted NBFC-specific and market-wide stress scenarios (individually and in combination). In designing liquidity stress scenarios, the nature of the NBFC’s business, activities and vulnerabilities should be taken into consideration so that the scenarios incorporate the major funding and market liquidity risks to which the NBFC is exposed.

viii) Contingency Funding Plan

An NBFC shall formulate a contingency funding plan (CFP) for responding to severe disruptions which might affect the NBFC’s ability to fund some or all of its activities in a timely manner and at a reasonable cost. Contingency plans should contain details of available/ potential contingency funding sources and the amount/ estimated amount which can be drawn from these sources, clear escalation/ prioritisation procedures detailing when and how each of the actions can and should be activated, and the lead time needed to tap additional funds from each of the contingency sources.

ix) Public disclosure

An NBFC shall publicly disclose information (Appendix I) on a quarterly basis on the official website of the company and in the annual financial statement as notes to account that enables market participants to make an informed judgment about the soundness of its liquidity risk management framework and liquidity position.

x) Intra Group transfers

With a view to recognizing the likely increased risk arising due to Intra-Group transactions and exposures (ITEs), the Group Chief Financial officer (CFO) is expected to develop and maintain liquidity management processes and funding programmes that are consistent with the complexity, risk profile, and scope of operations of the companies in the Group17. The Group liquidity risk management processes and funding programmes are expected to take into account lending, investment, and other activities, and ensure that adequate liquidity is maintained at the head and each constituent entity within the group. Processes and programmes should fully incorporate real and potential constraints, including legal and regulatory restrictions, on the transfer of funds among these entities and between these entities and the principal.

B. Management Information System (MIS)

An NBFC shall have a reliable MIS designed to provide timely and forward-looking information on the liquidity position of the NBFC and the Group to the Board and ALCO, both under normal and stress situations. It should capture all sources of liquidity risk, including contingent risks and those arising from new activities, and have the ability to furnish more granular and time-sensitive information during stress events.

C. Internal Controls

An NBFC shall have appropriate internal controls, systems and procedures to ensure adherence to liquidity risk management policies and procedure. Management should ensure that an independent party regularly reviews and evaluates the various components of the NBFC’s liquidity risk management process.

17As defined in the Master Direction - Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016

D. Maturity Profiling

For measuring and managing net funding requirements, the use of a maturity ladder and calculation of cumulative surplus or deficit of funds at selected maturity dates is adopted as a standard tool. The Maturity Profile should be used for measuring the future cash flows of NBFCs in different time buckets. The Maturity Profile as given in Appendix I could be used for measuring the future cash flows of NBFCs in different time buckets. The time buckets shall be distributed as under:

1 day to 7 days

8 days to 14 days

15 days to 30/31 days (one month)

Over one month and upto 2 months

Over two months and upto 3 months

Over 3 months and upto 6 months

Over 6 months and upto 1 year

Over 1 year and upto 3 years

Over 3 years and upto 5 years

Over 5 years

NBFCs would be holding in their investment portfolio, securities which could be broadly classifiable as 'mandatory securities' (under obligation of law) and other 'non-mandatory securities'. In case of NBFCs not holding public deposits, all investments in securities, and in case of NBFCs holding public deposits, the surplus securities (held over and above the requirement), shall fall in the category of 'non-mandatory securities'. Alternatively, the NBFCs may also follow the concept of Trading Book as per the extant prescriptions for NBFCs.

The NBFCs holding public deposits may be given freedom to place the mandatory securities in any time buckets as suitable for them. The listed non-mandatory securities may be placed in any of the "1 day to 7 days, 8 days to 14 days, 15 days to 30/31 days (One month)", Over one month and upto 2 months" and "Over two months and upto 3 months" buckets depending upon the defeasance period proposed by NBFCs. The unlisted non-mandatory securities (e.g., equity shares, securities without a fixed term of maturity, etc.) may be placed in the "Over 5 years" buckets, whereas unlisted non-mandatory securities having a fixed term of maturity may be placed in the relevant time bucket as per

residual maturity. The mandatory securities and listed securities may be marked to market for the purpose of the ALM system. Unlisted securities may be valued as per Prudential Norms Directions.

Alternatively, the NBFCs may also follow the concept of Trading Book which is as follows:

The composition and volume are clearly defined;

Maximum maturity/ duration of the portfolio is restricted;

The holding period not to exceed 90 days;

Cut-loss limit prescribed;

Defeasance periods (product-wise), i.e., time taken to liquidate the position on the basis of liquidity in the secondary market are prescribed;

NBFCs which maintain such ‘Trading Books’ and complying with the above standards shall show the trading securities under "1 day to 30/31 days (One month)", Over one month and upto 2 months" and "Over two months and upto 3 months" buckets on the basis of the defeasance periods. The Board/ ALCO of the NBFCs shall approve the volume, composition, holding/ defeasance period, cut loss, etc. of the ‘Trading Book'. The remaining investments shall also be classified as short term and long term investments as required under Prudential Norms.

The policy note recorded by the NBFCs on treatment of the investment portfolio for the purpose of ALM and approved by their Board/ ALCO shall be forwarded to the Regional Office of the Department of Supervision of RBI under whose jurisdiction the registered office of the company is located.

Within each time bucket, there could be mismatches depending on cash inflows and outflows. While the mismatches up to one year would be relevant since these provide early warning signals of impending liquidity problems, the main focus shall be on the short-term mismatches, viz., 1-30/31 days. The net cumulative negative mismatches in the Statement of Structural Liquidity in the maturity buckets 1-7 days, 8-14 days, and 15-30 days shall not exceed 10%, 10% and 20% of the cumulative cash outflows in the respective time buckets. NBFCs, however, are expected to monitor their cumulative mismatches (running total) across all other time buckets upto 1 year by establishing internal prudential limits

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with the approval of the Board. NBFCs shall also adopt the above cumulative mismatch limits for their structural liquidity statement for consolidated operations.

The Statement of Structural Liquidity may be prepared by placing all cash inflows and outflows in the maturity ladder according to the expected timing of cash flows. A maturing liability shall be a cash outflow while a maturing asset shall be a cash inflow.

In order to enable the NBFCs to monitor their short-term liquidity on a dynamic basis over a time horizon spanning from 1 day to 6 months, NBFCs shall estimate their short-term liquidity profiles on the basis of business projections and other commitments for planning purposes.

E. Liquidity Risk Measurement – Stock Approach

NBFCs shall adopt a “stock” approach to liquidity risk measurement and monitor certain critical ratios in this regard by putting in place internally defined limits as approved by their Board. The ratios and the internal limits shall be based on an NBFC’s liquidity risk management capabilities, experience and profile. An indicative list of certain critical ratios to monitor re short-term18 liability to total assets; short-term liability to long term assets; commercial papers to total assets; non-convertible debentures (NCDs)(original maturity of less than one year) to total assets; short-term liabilities to total liabilities; long-term assets to total assets; etc.

F. Currency Risk

Exchange rate volatility imparts a new dimension to the risk profile of an NBFC’s balance sheets having foreign assets or liabilities. The Board of NBFCs should recognise the liquidity risk arising out of such exposures and develop suitable preparedness for managing the risk.

G. Managing Interest Rate Risk (IRR)

The operational flexibility given to NBFCs in pricing most of the assets and liabilities imply the need for the financial system to hedge the Interest Rate Risk. Interest rate risk is the risk where changes in market interest rates might adversely affect an NBFC's financial condition. The changes in interest rates affect NBFCs in a larger way. The immediate impact of changes in interest rates is on NBFC's earnings (i.e. reported profits) by changing its Net Interest Income

Less than one year

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(NII). A long-term impact of changing interest rates is on NBFC's Market Value of Equity (MVE) or Net Worth as the economic value of NBFC's assets, liabilities and off-balance sheet positions get affected due to variation in market interest rates. The interest rate risk when viewed from these two perspectives is known as ‘earnings perspective’ and ‘economic value perspective', respectively. The risk from the earnings perspective can be measured as changes in the Net Interest Income (NII) or Net Interest Margin (NIM). There are many analytical techniques for measurement and management of Interest Rate Risk. To begin with, the traditional Gap analysis is considered as a suitable method to measure the Interest Rate Risk in the first place. It is the intention of RBI to move over to the modern techniques of Interest Rate Risk measurement like Duration Gap Analysis, Simulation and Value at Risk over time when NBFCs acquire sufficient expertise and sophistication in acquiring and handling MIS.

The Gap or Mismatch risk can be measured by calculating Gaps over different time intervals as at a given date. Gap analysis measures mismatches between rate sensitive liabilities and rate sensitive assets (including off-balance sheet positions). An asset or liability is normally classified as rate sensitive if:

within the time interval under consideration, there is a cash flow;

the interest rate resets/reprices contractually during the interval;

dependent on RBI changes in the interest rates/Bank Rate;

it is contractually pre-payable or withdrawal before the stated maturities.

The Gap Report shall be generated by grouping rate sensitive liabilities, assets and off-balance sheet positions into time buckets according to residual maturity or next repricing period, whichever is earlier. The difficult task in Gap analysis is determining rate sensitivity. All investments, advances, deposits, borrowings, purchased funds, etc. that mature/ reprice within a specified timeframe are interest rate sensitive. Similarly, any principal repayment of loan is also rate sensitive if the NBFC expects to receive it within the time horizon. This includes final principal payment and interim instalments. Certain assets and liabilities to receive/pay rates that vary with a reference rate. These assets and liabilities are repriced at pre-determined intervals and are rate sensitive at the time of repricing. While the interest rates on term deposits are fixed during their currency, the tranches of advances portfolio are basically floating. The interest rates on

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advances received could be repriced any number of occasions, corresponding to the changes in PLR.

The Gaps may be identified in the following time buckets:

1 day to 7 days

8 days to 14 days

15 days -30/31 days (One month)

Over one month to 2 months

Over two months to 3 months

Over 3 months to 6 months

Over 6 months to 1 year

Over 1 year to 3 years

Over 3 years to 5 years

Over 5 years

Non-sensitive

The various items of rate sensitive assets and liabilities and off-balance sheet items shall be classified as explained in Appendix - III.

The Gap is the difference between Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities (RSL) for each time bucket. The positive Gap indicates that it has more RSAs than RSLs whereas the negative Gap indicates that it has more RSLs than RLAs. The Gap reports indicate whether the institution is in a position to benefit from rising interest rates by having a positive Gap (RSA > RSL) or whether it is in a position to benefit from declining interest rates by a negative Gap (RSL > RSA). The Gap can, therefore, be used as a measure of interest rate sensitivity.

Each NBFC shall set prudential limits on individual Gaps with the approval of the Board/Management Committee. The prudential limits shall have a relationship with the Total Assets, Earning Assets or Equity. The NBFCs may work out Earnings at Risk (EaR) or Net Interest Margin (NIM) based on their views on interest rate movements and fix a prudent level with the approval of the Board/Management Committee. For working out EaR or NIM any of the current models may be used.

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The classification of various components of assets and liabilities into different time buckets for preparation of Gap reports (Liquidity and Interest Rate Sensitivity) as indicated in Appendices I & II is the benchmark. NBFCs which are better equipped to reasonably estimate the behavioural pattern of various components of assets and liabilities on the basis of past data / empirical studies could classify them in the appropriate time buckets, subject to approval from the ALCO / Board. A copy of the note approved by the ALCO / Board shall be sent to the Regional Office of the Department of Supervision of RBI under whose jurisdiction the registered office of the company is located. These notes may contain 'what if scenario' analysis under various assumed conditions and the contingency plans to face various adverse developments.

The present framework does not capture the impact of premature closure of deposits and prepayment of loans and advances on the liquidity and interest rate risks profile of NBFCs. The magnitude of premature withdrawal of deposits at times of volatility in market interest rates is quite substantial. NBFCs shall, therefore, evolve suitable mechanism, supported by empirical studies and behavioural analysis to estimate the future behaviour of assets, liabilities and off-balance sheet items to changes in market variables and estimate the probabilities of options.

A scientifically evolved internal transfer pricing model by assigning values on the basis of current market rates to funds provided and funds used is an important component for effective implementation of ALM System. The transfer price mechanism can enhance the management of margin i.e. lending or credit spread, the funding or liability spread and mismatch spread. It also helps centralising interest rate risk at one place which facilitates effective control and management of interest rate risk. A well-defined transfer pricing system also provides a rational framework for pricing of assets and liabilities.

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Appendix I

Public disclosure on liquidity risk

Funding Concentration based on significant counterparty (both deposits and borrowings)

Sr Number of Amount % of Total % of Total

No. Significant (Rs. crore) deposits Liabilities

Counterparties

Top 20 large deposits (amount in Rs. crore and % of total deposits)

Top 10 borrowings (amount in Rs. crore and % of total borrowings)

Funding Concentration based on significant instrument/product

Sr No.

Name of the

instrument/product

Amount

(Rs. crore)

of Total Liabilities

Stock Ratios:

Commercial papers as a % of total public funds, total liabilities and total assets

Non-convertible debentures (original maturity of less than one year) as a % of total public funds, total liabilities and total assets

Other short-term liabilities, if any as a % of total public funds, total liabilities and total assets

(vi) Institutional set-up for liquidity risk management

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Appendix - II

Maturity Profile - Liquidity

Heads of AccountsTime-bucket category

A. Outflows

1. Capital funds

a) Equity capital, Non-redeemable orIn the 'over 5 years' time-bucket.

perpetual preference capital, Reserves, Funds

and Surplus

b) Preference capital - redeemable/ non-As per the residual maturity of the shares.

perpetual

2. Gifts, grants, donations and benefactionsThe 'over 5 years' time-bucket. However, if

such gifts, grants, etc. are tied to specific

end-use, then these may be slotted in the

time-bucket as per purpose/ end-use

specified.

3. Notes, Bonds and Debentures

a) Plain vanilla bonds/debenturesAs per the residual maturity of the

instruments

b) Bonds/debentures with embedded call/putAs per the residual period for the earliest

options (including zero-coupon/deep discountexercise date for the embedded option.

bonds)

c) Fixed rate notesAs per the residual maturity

4. Deposits:

a) Public depositsAs per the residual maturity.

b) Inter Corporate DepositsThese,beinginstitutional/wholesale

deposits, shall be slotted as per their

residual maturity

c) Commercial PapersAs per the residual maturity

5. Borrowings

a) Term money borrowingsAs per the residual maturity

b) From RBI, Govt. & others-do-

c) Bank borrowings in the nature of WCDL,Over six months and up to one year

CC etc

6) Current liabilities and provisions:

a) Sundry creditorsAs per the due date or likely timing of cash

outflows. A behavioural analysis could also

be made to assess the trend of outflows and

the amounts slotted accordingly.

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Heads of AccountsTime-bucket category

b) Expenses payable (other than interest)As per the likely time of cash outflow.

c) Advance income received, receipts fromIn the 'over 5 years' time-bucket as these do

borrowers pending adjustmentnot involve any cash outflow.

d) Interest payable on bonds/depositsIn respective time buckets as per the due

date of payment.

e) Provisions for NPAsThe amount of provision may be netted out

from the gross amount of the NPA portfolio

and the net amount of NPAs be shown as

an item under inflows in stipulated time-

buckets.

f) Provision for Investments portfolioThe amount may be netted from the gross

value of investments portfolio and the net

investments be shown as inflow in the

prescribed time-slots. In case provisions are

not held security-wise, the provision may be

shown on "over 5 years" time bucket.

g) Other provisionsTo be bucketed as per the purpose/nature

of the underlying transaction.

B. Inflows

1. CashIn 1 to 7 day time-bucket.

2. Remittance in transit---do---

3. Balances with banks (in India only)

a) Current accountThe stipulated minimum balance be shown

in 6 months to 1 year bucket. The balance in

excess of the minimum balance be shown

under Day 1-7 bucket.

b) Deposit accounts/short term depositsAs per residual maturity.

4. Investments (net of provisions)

a) Mandatory investmentsAs suitable to the NBFC

b) Non Mandatory Listed"1 day to 30/31 days (One month)" Over

one month and upto 2 months" and "Over

two months and upto 3 months" buckets

depending upon the defeasance period

proposed by the NBFCs

c) Non Mandatory unlisted securities (e.g."Over 5 years"

shares, etc.)

d) Non-mandatory unlisted securities having aAs per residual maturity

fixed term maturity

e) Venture capital unitsIn the 'over 5 year' time bucket.

5. In case Trading book is followed

Equity shares, convertible preference shares,(i)Sharesclassifiedas"current"

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Heads of AccountsTime-bucket category

non-redeemable/perpetual preference shares, investments representing trading book of

shares of subsidiaries/joint ventures and units the NBFC may be shown in time buckets of

in open ended mutual funds and other "1 day 7 days, 8 days to 14 days , 15 days

investments. to 30 days (One month)""Over one month

and upto 2 months" and "Over two months

and upto 3 months" buckets depending

upon the defeasance period proposed by

the NBFCs .

(ii) Shares classified as "long term"

investments may be kept in over "5 years

time" bucket. However, the shares of the

assisted units/companies acquired as part

of the initial financing package, may be

slotted in the relative time bucket keeping in

viewthepaceofproject

implementation/time-overrun, etc., and the

resultant likely timeframe for divesting such

shares.

6. Advances (performing)

a) Bill of Exchange and promissory notes As per the residual usance of the underlying

discounted and rediscountedbills.

b) Term loans (rupee loans only) The cash inflows on account of the interest

and principal of the loan may be slotted in

respective time buckets as per the timing of

the cash flows as stipulated in the

original/revised repayment schedule.

c) Corporate loans/short term loansAs per the residual maturity

7.Non-performingloans

(May be shown net of the provisions, interest

suspense held )

a) Sub-standard

i) All overdues and instalments of principalIn the 3 to 5 year time-bucket.

falling due during the next three years

ii) Entire principal amount due beyond theIn the over 5 years time-bucket

next three years

b) Doubtful and loss

i) All instalments of principal falling due duringIn the over 5 year time-bucket

the next five years as also all overdues

ii) Entire principal amount due beyond theIn the over 5 year time-bucket

next five years

8. Assets on lease Cash flows from the lease transaction may

be slotted in respective time buckets as per

the timing of the cash flow.

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Heads of AccountsTime-bucket category

9. Fixed assets (excluding leased assets)In the 'over 5 year' time-bucket.

10. Other assets

(a) Intangible assets and items notIn the 'over 5 year' time-bucket.

representing cash inflows.

(b)Other items (such as accrued income,In respective maturity buckets as per the

other receivables, staff loans, etc.)timing of the cash flows.

C. Contingent liabilities

(a) Letters of credit/guarantees (outflowBased on the past trend analysis of the

through devolvement)devolvements vis-à-vis the outstanding

amount of guarantees (net of margins held),

the likely devolvements shall be estimated

and this amount could be distributed in

various time buckets on judgmental basis.

The assets created out of devolvements

may be shown under respective maturity

buckets on the basis of probable recovery

dates.

(b) Loan commitments pending disbursalIn the respective time buckets as per the

(outflow)sanctioned disbursement schedule.

Institutions (outflow/inflow)under the lines of credit.

Note:

Any event-specific cash flows (e.g. outflow due to wage settlement arrears, capital expenses, income tax refunds, etc.) shall be shown in a time bucket corresponding to timing of such cash flows.

All overdue liabilities be shown in the 1 to 7 days and 8-14 days days time buckets based on behavioural estimates

Overdue receivables on account of interest and instalments of standard loans/ hire purchase assets / leased rentals shall be slotted as below:

(i) Overdue for less than one month. In the 3 to 6 month bucket.

(ii) Interest overdue for more than one month In the 6 to 12 month bucket without

but less than seven months (i.e. before thereckoning the grace period of one

relative amount becomes past due for sixmonth.

months)

(iii) Principal instalments overdue for 7 months In 1 to 3 year bucket.

but less than one year

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Appendix III

Interest Rate Sensitivity

Heads of accountsRate sensitivity of time bucket

LIABILITIES

1. Capital, Reserves & SurplusNon-sensitive

2. Gifts, grants & benefactions-do-

3. Notes, bonds & debentures:

a) Floating rateSensitive; reprice on the roll- over/repricing

date, shall be slotted in respective time buckets

as per the repricing dates.

b) Fixed rate (plain vanilla) including zeroSensitive; reprice on maturity. To be placed in

couponsrespective time buckets as per the residual

maturity of such instruments.

c) Instruments with embedded optionsSensitive; could reprice on the exercise date of

the option particularly in rising interest rate

scenario. To be placed in respective time

buckets as per the next exercise date.

4. Deposits

a) Deposits/Borrowings

i) Fixed rateSensitive; could reprice on maturity or in case of

premature withdrawal being permitted, after the

lock-in period, if any, stipulated for such

withdrawal. To be slotted in respective time

buckets as per residual maturity or as per

residual lock-in period, as the case may be. The

prematurely withdrawable deposits with no lock-

in period or past such lock-in period, shall be

slotted in the earliest /shortest time bucket.

ii) Floating rateSensitive; reprice on the contractual roll-over

date. To be slotted in the respective time-

buckets as per the next repricing date.

b) ICDsSensitive; reprice on maturity. To be slotted as

per the residual maturity in the respective time

buckets.

5. Borrowings:

a) Term-money borrowingSensitive; reprices on maturity. To be placed as

per residual maturity in the relative time bucket.

b) Borrowings from others

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Heads of accountsRate sensitivity of time bucket

i) Fixed rateSensitive; reprice on maturity. To be placed as

per residual maturity in the relative time bucket.

ii) Floating rateSensitive; reprice on the roll-over/ repricing

date. To be placed as per residual period to the

repricing date in the relative time bucket.

6. Current liabilities & provisions

a.Sundry creditors)

b.Expenses payable)

c.Swap adjustment a/c.)

d.Advance income received/receipts)Non-sensitive

fromborrowerspending)

adjustment)

e.Interest payable on bonds/deposits)

f.Provisions)

7. Repos/ bills rediscounted/forex swapsSensitive; reprices on maturity. To be placed as

(Sell / Buy)per the residual maturity in respective buckets.

ASSETS:

1. CashNon-sensitive.

2. Remittance in transitNon-sensitive.

3. Balances with banks in India

a) In current a/c.Non-sensitive.

b) In deposit accounts, Money at call andSensitive; reprices on maturity. To be placed as

short notice and other placementsper residual maturity in respective time-buckets.

4. Investments

a) Fixed income securities (e.g., Govt.Sensitive on maturity. To be slotted as per

securities, zero coupon bonds, bonds,residual maturity.

debentures, cumulative, non-cumulative,

redeemable preference shares, etc.)However, the bonds/ debentures valued by

applying NPA norms due to non-servicing of

interest, shall be shown, net of provisions made,

in:

i.3-5 year bucket - if sub-standard norms

applied.

ii. Over 5-year bucket - if doubtful norms

applied.

b) Floating rate securitiesSensitive; re-price on the next repricing date. To

be slotted as per residual time to the repricing

date.

c) Equity shares, convertible preferenceNon-sensitive.

shares,sharesof subsidiaries/joint

ventures, venture capital units.

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Heads of accountsRate sensitivity of time bucket

5. Advances (performing)

a) Bills of exchange, promissory notes Sensitive on maturity. To be slotted as per the

discounted & rediscounted residual usance of the underlying bills.

b) Term loans/corporate loans / Short

Term Loans (rupee loans only)

i) Fixed Rate Sensitive on cash flow/ maturity.

ii) Floating Rate Sensitive only when PLR or risk premium is

changed by the NBFCs.

The amount of term loans shall be slotted in

time buckets which correspond to the time

taken by NBFCs to effect changes in their PLR

in response to market interest rates.

6. Non-performing loans

(net of provisions, interest suspense and

claims received from ECGC)

a.Sub-standardTo be slotted as indicated at item B.7

b.Doubtful and Lossof Appendix I.

7. Assets on lease The cash flows on lease assets are sensitive to

changes in interest rates. The leased asset

cash flows be slotted in the time-buckets as per

timing of the cash flows.

8. Fixed assets (excluding assets on Non-sensitive.

lease)

9. Other assets

a) Intangible assets and items not Non-sensitive.

representing cash flows

b) Other items (e.g. accrued income, other Non-sensitive.

receivables, staff loans, etc.)

10. Reverse Repos/ Swaps (Buy /Sell) Sensitive on maturity. To be slotted as per

and Bills rediscounted (DUPN) residual maturity.

11. Other (interest rate) products

a) Interest rate swaps Sensitive; to be slotted as per residual maturity

in respective time buckets.

b) Other Derivatives To be classified suitably as per the residual

maturity in respective time buckets

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Annex III

Guidelines on Liquidity Coverage Ratio (LCR)

1) Applicability

In addition to the guidelines laid down in Annex II of these guidelines, all non-deposit taking systemically important NBFCs with asset size of ₹5,000 crore and above (except Core Investment Companies, Type I NBFC-NDs19, Non-Operating Financial Holding Companies and Standalone Primary Dealers) and all deposit taking NBFCs irrespective of the asset size shall adhere to the following guidelines while computing the Liquidity Coverage Ratio.

2) Definitions

In these Directions, unless the context otherwise requires, the terms herein shall bear the meanings assigned to them below

i. “High Quality Liquid Assets (HQLA)” means liquid assets that can be readily sold or immediately converted into cash at little or no loss of value or used as collateral to obtain funds in a range of stress scenarios.

Liquidity Coverage Ratio (LCR) is represented by the following ratio:

“Unencumbered” means free of legal, regulatory, contractual or other restrictions on the ability of the NBFC to liquidate, sell, transfer, or assign the asset.

All other expressions unless defined herein shall have the same meaning as have been assigned to them under the Reserve Bank of India Act, 1934 or any statutory modification or re-enactment thereto or as used in commercial parlance, as the case may be.

Type I NBFC-ND as defined in RBI press release dated June 17, 2016. 113

3) General Guidelines

An NBFC shall maintain an adequate level of unencumbered HQLA that can be converted into cash to meet its liquidity needs for a 30 calendar-day time horizon under a significantly severe liquidity stress scenario, as specified in these guidelines.

LCR shall be maintained as at C) below on an ongoing basis to help monitor and control liquidity risk.

(i) The LCR requirement shall be binding on all non-deposit taking systemically important NBFCs with asset size of ₹10,000 crore and above and all deposit taking NBFCs irrespective of the asset size from December 1, 2020, with the minimum LCR to be 50%, progressively increasing, till it reaches the required level of 100%, by December 1, 2024, as per the timeline given below:

From December December 1, December 1, December 1, December 1,

1, 20202021202220232024

Minimum 50% 60% 70% 85% 100%

LCR

Further, Non-deposit taking NBFCs with asset size of ₹5,000 crore and above but less than ₹10,000 crore shall also maintain the required level of LCR starting December 1, 2020, as per the timeline given below:

From December 1, December 1, December 1, December 1, December 1,

20202021202220232024

Minimum 30% 50% 60% 85% 100%

LCR

The LCR shall continue to be minimum 100% (i.e., the stock of HQLA shall at least equal total net cash outflows) on an ongoing basis with effect from December 1, 2024, i.e., at the end of the phase-in period.

Provided that NBFCs shall have the option to use their stock of HQLA, thereby allowing LCR to fall below 100% during a period of financial stress.

Provided further that NBFCs shall immediately report to RBI (Department of Regulation and Department of Supervision) such use of stock of HQLA during a

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period of financial stress along with reasons for such usage and corrective steps initiated to rectify the situation.

The stress scenario for LCR intends to cover a combined idiosyncratic and market-wide shock that would result in:

run-off of a proportion of deposits (in case of deposit taking NBFCs);

a partial loss of unsecured wholesale funding capacity;

a partial loss of secured, short-term financing with certain collateral and counterparties;

additional contractual outflows that would arise from a downgrade in the NBFC’s credit rating, including collateral posting requirements;

increases in market volatilities that impact the quality of collateral or potential future exposure of derivative positions and thus require larger collateral haircuts or additional collateral, or lead to other liquidity needs;

unscheduled draws on committed but unused credit and liquidity facilities that the NBFC has provided to its clients; and,

the potential need for the NBFC to buy back debt or honour non-contractual obligations in the interest of mitigating reputational risk.

4) High Quality Liquid Assets

Liquid assets comprise of high quality assets that can be readily sold or used as collateral to obtain funds in a range of stress scenarios. They shall be unencumbered. Assets are considered to be high quality liquid assets if they can be easily and immediately converted into cash at little or no loss of value. The liquidity of an asset depends on the underlying stress scenario, the volume to be monetized and the timeframe considered. Nevertheless, there are certain assets that are more likely to generate funds without incurring large discounts due to fire-sales even in times of stress.

The fundamental characteristics of HQLAs include low credit and market risk; ease and certainty of valuation; low correlation with risky assets and listing on a developed and recognized exchange market. The market related characteristics of HQLAs include active and sizeable market; presence of committed market makers;

115

low market concentration and flight to quality (tendencies to move into these types of assets in a systemic crisis).

Assets to be included in the computation of HQLAs are those that the NBFC is holding on the first day of the stress period. Such assets shall be valued at an amount no greater than their current market value for the purpose of computing the LCR. Depending upon the nature of assets, they have been assigned different haircuts below, which are to be applied while calculating the HQLA for the purpose of calculation of LCR. The assets and the haircuts are as under:

Assets to be included as HQLA without any haircut i. Cash20

Government securities

Marketable securities issued or guaranteed by foreign sovereigns satisfying all the following conditions:

Assigned a 0% risk weight by banks under standardized approach for credit risk;

Traded in large, deep and active repo or cash markets characterised by a low level of concentration; and proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions.

Not issued by a bank/ financial institution/ NBFC or any of its affiliated entities.

Assets to be considered for HQLA with a minimum haircut of 15%

Marketable securities representing claims on or claims guaranteed by sovereigns, Public Sector Entities (PSEs) or multilateral development banks that are assigned a 20% risk weight by banks under standardised approach for credit risk and provided that they are not issued by a bank/financial institution/NBFC or any of its affiliated entities.

Corporate bonds, not issued by a bank/financial institution/NBFC or any of its affiliated entities, which have been rated AA- or above by an eligible credit rating agency.

Cash would mean cash on hand and demand deposits with Scheduled Commercial Banks. 116

Commercial Papers not issued by a bank/ PD/ financial institution or any of its affiliated entities, which have a short-term rating equivalent to the long-term rating of AA- or above by an eligible credit rating agency.

Assets to be considered for HQLA with a minimum haircut of 50%

Marketable securities representing claims on or claims guaranteed by sovereigns having risk weights higher than 20% but not higher than 50%, i.e., they should have a credit rating not lower than BBB-as prescribed for banks in India.

Common Equity Shares which satisfy all of the following conditions:

not issued by a bank/ financial institution/NBFC or any of its affiliated entities;

included in NSE CNX Nifty index and/or S&P BSE Sensex index.

Corporate debt securities (including commercial paper) and the securities having usual fundamental and market related characteristics for HQLAs and meeting the following conditions:

not issued by a bank, financial institution, PD, NBFC or any of its affiliated entities;

have a long-term credit rating from an eligible credit rating agency between A+ and BBB- or in the absence of a long-term rating, a short-term rating equivalent in quality to the long-term rating;

traded in large, deep and active repo or cash markets characterised by a low level of concentration; and

have a proven record as a reliable source of liquidity in the markets (repo or sale) even during stressed market conditions, i.e. a maximum decline of price not exceeding 20% or increase in haircut over a 30-day period not exceeding 20 percentage points during a relevant period of significant liquidity stress.

For the purpose of computing LCR for deposit taking NBFCs, such unencumbered approved securities held as per the provisions of section 45 IB of RBI Act, would be reckoned as HQLA only to the extent of 80% of the required holding.

All assets in the stock of liquid assets must be managed as part of that pool by the NBFC and shall be subject to the following operational requirements:

117

must be available at all times to be converted into cash;

shall be unencumbered;

shall not be co-mingled/ used as hedges on trading position; designated as collateral or credit enhancement in structured transactions or designated to cover operational costs;

shall be managed with sole intent for use as a source of contingent funds; and,

shall be under the control of specific function/s charged with managing liquidity risk of the bank, e.g. ALCO.

NBFCs should periodically monetize a proportion of assets through repo or outright sale to test the saleability of these assets and to minimize the risk of negative signalling during period of stress. NBFCs are also expected to maintain liquid assets consistent with distribution of their liquidity needs by currency.

If an eligible liquid asset becomes ineligible (e.g. due to downgrade), NBFCs will be allowed to keep the asset in their stock of liquid assets for an additional 30 calendar days in order to have sufficient time to adjust the stock / replace the asset.

5) Total net cash outflows

Total net cash outflows is defined as the total expected cash outflows minus total expected cash inflows for the subsequent 30 calendar days. Considering the unique nature of the balance sheet of the NBFCs, stressed cash flows is computed by assigning a predefined stress percentage to the overall cash inflows and cash outflows. Total expected cash outflows (stressed outflows) are calculated by multiplying the outstanding balances of various categories or types of liabilities and off-balance sheet commitments by 115% (15% being the rate at which they are expected to run off further or be drawn down). Total expected cash inflows (stressed inflows) are calculated by multiplying the outstanding balances of various categories of contractual receivables by 75% (25% being the rate at which they are expected to under-flow). However, total cash inflows will be subjected to an aggregate cap of 75% of total expected cash outflows. In other words, total net cash outflows over the next 30 days = Stressed Outflows - Min (stressed inflows; 75% of stressed outflows).

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realised during the preceding 24 months) based on look back approach (iv) Increased liquidity needs related to the potential for valuation changes in collateral securing derivatives

(v) Increased liquidity needs related to excess non-segregated collateral held that could contractually be called at any time by the counterparty

(vi) Increased liquidity needs related to contractually required collateral on transactions for which the counterparty has not yet demanded the collateral be posted

(vii) Increased liquidity needs related to derivative transactions that allow collateral substitution to non-HQLA assets

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absolute net 30-day collateral flows

Items of Cash InflowsItems of Cash Outflows

a. Maturingsecuredlendinga.Deposits

transactions backed by HQLAb.Unsecured wholesale Funding

b. MarginLending backedby allc.Secured Funding

other collateral

c. All other assets d. Additional requirements

[(i)+(ii)+(iii)+(iv)+(v) +(vi)+(vii)+(viii)]:

d.Lines of credit – Credit or liquidity(i) Net derivative cash outflows

facilitiesor other contingent(ii) Liquidity needs (e.g. collateral calls)

funding facilities that the NBFCrelated tofinancingtransactions,

holds at other institutions for its

own purposederivatives and other contracts where

e. Other inflows by counterparty ‘downgrade triggers’ up to and

f.Net derivatives cash inflowsincluding a 3-notch downgrade

(iii) Market valuation changes on

g. Other contractual cash inflows derivatives transactions (largest

(please specify as footnotes)

Items of Cash InflowsItems of Cash Outflows

(viii)Currently undrawn committed

credit and liquidity facilities

(e) Other contingent funding liabilities

(f) Any other contractual outflows not

captured elsewhere in the template

Computation of Net cash outflows

S No.Net Cash outflows over the 30Amount

days period

ATotal Cash Outflows

BStressed Cash Outflows

(A*115%)

CTotal Cash Inflows

DStressed Cash Inflows (C*75%)

ETotal net cash outflows over the

next 30 days = Stressed

Outflows (B) - Minimum of

(Stressed Inflows (D); 75% of

Stressed Outflows(B)).

NBFCs will not be permitted to double count items, i.e., if an asset is included as part of the “stock of HQLA” (i.e., the numerator), the associated cash inflows cannot also be counted as cash inflows (i.e., part of the denominator). Where there is potential that an item could be counted in multiple outflow categories (e.g., committed liquidity facilities granted to cover debt maturing within the 30 calendar day period), an NBFC only has to assume up to the maximum contractual outflow for that product.

6) LCR Disclosure Standards

NBFCs are required to disclose information on their LCR every quarter. Further, NBFCs in their annual financial statements under Notes to Accounts, starting with the financial year ending March 31, 2021, shall disclose information on LCR for all the four quarters of the relevant financial year. The disclosure format is given in the Appendix I.

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Data must be presented as simple averages of monthly observations over the previous quarter (i.e., the average is calculated over a period of 90 days). However, with effect from the financial year ending March 31, 2022, the simple average shall be calculated on daily observations.

In addition to the disclosures required by the format given in Appendix I, NBFCs should provide sufficient qualitative discussion (in their annual financial statements under Notes to Accounts) around the LCR to facilitate understanding of the results and data provided. For example, where significant to the LCR, NBFCs could discuss: (a) the main drivers of their LCR results and the evolution of the contribution of inputs to the LCR’s calculation over time; (b) intra-period changes as well as changes over time; (c) the composition of HQLAs; (d) concentration of funding sources; (e) derivative exposures and potential collateral calls; (f) currency mismatch in the LCR; (g) other inflows and outflows in the LCR calculation that are not captured in the LCR common template but which the institution considers to be relevant for its liquidity profile.

Appendix I

LCR Disclosure Template

TotalTotal

Unweighted21

Weighted22

(₹ in Crore) Value (average) Value (average)

High Quality Liquid Assets

1**Total High Quality Liquid Assets

(HQLA)

CashOutflows

2Deposits(fordeposittaking

companies)

3Unsecured wholesale funding

4Secured wholesale funding

5Additional requirements, of which

(i)Outflowsrelatedtoderivative

exposuresandothercollateral

requirements

(ii)Outflows related to loss of funding on

debt products

(iii)Credit and liquidity facilities

6Other contractual funding obligations

7Other contingent funding obligations

Unweighted values must be calculated as outstanding balances maturing or callable within 30 days (for inflows and outflows). 22Weighted values must be calculated after the application of respective haircuts (for HQLA) and stress factors on inflow and outflow.

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TOTAL CASH OUTFLOWS

Cash Inflows

Secured lending

Inflows from fully performing exposures

Other cash inflows

TOTAL CASH INFLOWS

Total Adjusted

Value

TOTAL HQLA

TOTAL NET CASH OUTFLOWS

LIQUIDITY COVERAGE RATIO (%)

**Components of HQLA need to be disclosed

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Annex IIIA

Reporting format for NBFCs declaring dividend

Details of dividend declared during the financial year

Name of the NBFC – _________

Accounting

period *

Net profit for the accounting period (₹ crore)

Rate of

dividend

(per cent)

Amount of

dividend

(₹ crore)

Dividend Pay out ratio (per cent)

* quarter or half year or year ended ----- as the case may be

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Annex IV

Schedule to the Balance Sheet of a NBFC

(₹ in lakh)

Particulars

Liabilities side Amount Amount

outstandingoverdue

Loans and advances availed by the non-banking financial company inclusive of interest accrued thereon but not paid :

(a) Debentures : Secured

: Unsecured

(other than falling within the

meaning of public deposits*)

(b) Deferred Credits

(d) Inter-corporate loans and borrowing

(e) Commercial Paper

Public Deposits*

Other Loans (specify nature)

* Please see Note 1 below

Break-up of (1)(f) above (Outstanding public deposits inclusive of interest accrued thereon but not paid) :

In the form of Unsecured debentures

In the form of partly secured debentures i.e. debentures where there is a shortfall in the value of security

Other public deposits

* Please see Note 1 below

Assets side Amount outstanding

Break-up of Loans and Advances including bills receivables [other than those included in

(4) below]:

Secured

Unsecured

Break up of Leased Assets and stock on hire and other assets counting towards asset financing activities

Lease assets including lease rentals under sundry debtors :

Financial lease

Operating lease

Stock on hire including hire charges under sundry debtors :

Assets on hire

Repossessed Assets

Other loans counting towards asset financing activities

Loans where assets have been repossessed

Loans other than (a) above

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Break-up of Investments Current Investments

Quoted

Equity

Preference

Units of mutual funds

Government Securities

Others (please specify)

Unquoted

Equity

Preference

Units of mutual funds

Government Securities

(v) Others (please specify)

Long Term investments

1. Quoted

Equity

Debentures and Bonds

Units of mutual funds

(v) Others (please specify)

Equity

Debentures and Bonds

Units of mutual funds

Government Securities

Others (please specify)

(vi)

Borrower group-wise classification of assets financed as in (3) and (4) above :

Please see Note 2 below

CategoryAmount net of provisions

SecuredUnsecuredTotal

1. Related Parties **

(a) Subsidiaries

(b) Companies in the same group

Other related parties

Other than related parties

Total

Investor group-wise classification of all investments (current and long term) in shares and securities (both quoted and unquoted) :

Please see note 3 below

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Market

Value /Book Value

CategoryBreak up or(Net of

fair value orProvisions)

NAV

1. Related Parties **

Subsidiaries

Companies in the same group

Other than related parties

Total

As per Accounting Standard of ICAI (Please see Note 3)

Other information

Particulars Amount

Gross Non-Performing Assets

Related parties

Other than related parties

Net Non-Performing Assets

Related parties

Other than related parties

(iii) Assets acquired in satisfaction of debt

Notes:

As defined in point xxvii of paragraph 3 of Chapter -II of these Directions.

Provisioning norms shall be applicable as prescribed in these Directions.

All notified Accounting Standards and Guidance Notes issued by ICAI are applicable including for valuation of investments and other assets as also assets acquired in satisfaction of debt. However, market value in respect of quoted investments and break up / fair value / NAV in respect of unquoted investments shall be disclosed irrespective of whether they are classified as long term (amortised cost in the case of Ind AS) or current (at fair value in the case of Ind AS) in (5) above.

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Annex V

Data on Pledged Securities

Name of the

NBFC Lender

PAN

Date of

Reporting

Share holding

Information

Name of No of Type of the Name of PAN of

ISINShares heldBorrower

the the the

Company against (Promoter/Non Borrower Borrower

loansPromoter)

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Annex VI

Guidelines for Licensing of New Banks in the Private Sector

Definitions

I. Promoter

Promoter means, the person who together with his relatives (as defined in section 6 of the Companies Act, 1956), by virtue of his ownership of voting equity shares, is in effective control of the NOFHC, and includes, wherever applicable, all entities which form part of the Promoter Group.

Promoter Group "Promoter Group" includes:

(i) the promoter;

(ii) relatives of the promoter as defined in Section 6 of Companies Act 1956; and (iii) in case promoter is a body corporate:

(A) a subsidiary or holding company of such body corporate;

(B) any body corporate in which the promoter holds ten per cent or more of the equity share capital or which holds ten per cent or more of the equity share capital of the promoter;

(C) any body corporate in which a group of individuals or companies or combinations thereof which hold twenty per cent or more of the equity share capital in that body corporate also holds twenty per cent or more of the equity share capital of the promoter;

(D) Joint venture (as defined in terms of AS 23) with the promoter;

(E) Associate (as defined in terms of AS 27) of the promoter;

(F) Related party (as defined in terms of AS 18) of the promoter; and (iv) in case the promoter is an individual:

(A) any body corporate in which ten per cent or more of the equity share capital is held by the promoter or a relative of the promoter or a firm or Hindu Undivided Family in which the promoter or any one or more of his immediate relative is a member;

(B) any body corporate in which a body corporate as provided in (A) above holds ten per cent or more, of the equity share capital;

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any Hindu Undivided Family or firm in which the aggregate shareholding of the promoter and his immediate relatives is equal to or more than ten per cent of the total; and

(v) all persons whose shareholding is aggregated for the purpose of disclosing in the prospectus under the heading "shareholding of the promoter group";

(vi) Entities sharing a common brand name with entities discussed in A, B, C, D E, F where the promoter is a body corporate and A, B, C where the promoter is an individual;

Provided that a financial institution, scheduled bank, foreign institutional investor or mutual fund shall not be deemed to be promoter group merely by virtue of the fact that ten per cent or more of the equity share capital of the promoter is held by such institution.

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Annex VII

Projects under implementation

1.1 For all projects financed by the NBFCs, the 'Date of Completion' and the 'Date of Commencement of Commercial Operations' (DCCO), of the project shall be clearly spelt out at the time of financial closure of the project and the same shall be formally documented. These shall also be documented in the appraisal note by the NBFCs during sanction of the loan.

1.2 Project Loans

There are occasions when the completion of projects is delayed for legal and other extraneous reasons like delays in Government approvals etc. All these factors, which are beyond the control of the promoters, may lead to delay in project implementation and involve restructuring / reschedulement of loans by NBFCs. Accordingly, the following asset classification norms shall apply to the project loans before commencement of commercial operations.

For this purpose, all project loans have been divided into the following two categories:

Project Loans for infrastructure sector

Project Loans for non-infrastructure sector

For the purpose of these Directions, 'Project Loan' shall mean any term loan which has been extended for the purpose of setting up of an economic venture. Further, Infrastructure Sector is as defined in the extant Prudential Norms Directions for NBFCs.

1.3. Project Loans for Infrastructure Sector

A loan for an infrastructure project shall be classified as NPA during any time before commencement of commercial operations as per record of recovery, unless it is restructured and becomes eligible for classification as 'standard asset' in terms of paras (iii) to (v) below.

A loan for an infrastructure project shall be classified as NPA if it fails to commence commercial operations within two years from the original DCCO, even if it is regular as per record of recovery, unless it is

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restructured and becomes eligible for classification as 'standard asset' in terms of paras (iii) to (v) below.

If a project loan classified as 'standard asset' is restructured any time during the period up to two years from the original DCCO, it shall be retained as a standard asset if the fresh DCCO is fixed within the following limits, and further provided the account continues to be serviced as per the restructured terms.

Infrastructure Projects involving court cases

Up to another 2 years (beyond the existing extended period of 2 years, as prescribed in para 1.3(ii), i.e. total extension of 4 years), in case the reason for extension of date of commencement of production is arbitration proceedings or a court case.

Infrastructure Projects delayed for other reasons beyond the control of promoters

Up to another 1 year (beyond the existing extended period of 2 years, as prescribed in para 1.3(ii), i.e. total extension of 3 years), in other than court cases.

It is re-iterated that the dispensation in para 1.3(iii) is subject to adherence to the provisions regarding restructuring of accounts which shall inter alia require that the application for restructuring shall be received before the expiry of period of two years from the original DCCO and when the account is still standard as per record of recovery. The other conditions applicable shall be:

In cases where there is moratorium for payment of interest, NBFCs shall not book income on accrual basis beyond two years from the

original DCCO, considering the high risk involved in such restructured accounts.

NBFCs shall maintain following provisions on such accounts as long as these are classified as standard assets in addition to provision for diminution in fair value :

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ParticularsProvisioning Requirement

If the revised DCCO is within*0.25 percent

two years from the original

DCCO prescribed at the time

of financial closure

If the DCCO is extended Project loans restructured with effect

beyond two years and uptofrom January 24, 2014 :

four years orthree years

*5.00 per cent - From the date of such

from the original DCCO, as restructuring till the revised DCCO or

the case may be, depending 2 years from the- date of

upon the reasons for suchrestructuring, whichever is later.

delay

Stock of project loans classified as

restructured as on January 23, 2014 :

-2.75 percent - witheffectfrom

March 31, 2014

-3.50 percent - witheffectfrom

March 31, 2015(spread over the

four quarters of 2014-15)

-4.25 percent - witheffectfrom

March 31, 2016(spread over the

four quarters of 2015-16)

-5 percent - with effect from March

31, 2017 (spread over the four

quarters of 2016-17)

*The above provisions shall be

applicable from the date of

restructuring till the revised DCCO or

2 years from the date of restructuring,

whichever is later.

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For the purpose of these Directions, mere extension of DCCO shall not be considered as restructuring, if the revised DCCO falls within the period of two years from the original DCCO. In such cases the consequential shift in repayment period by equal or shorter duration (including the start date and end date of revised repayment schedule) than the extension of DCCO shall also not be considered as restructuring provided all other terms and conditions of the loan remain unchanged. As such project loans shall be treated as standard assets in all respects, they shall attract standard asset provision of 0.25 per cent.

(v)(a) Multiple revisions of the DCCO and consequential shift in repayment schedule for equal or shorter duration (including the start date and end date of revised repayment schedule) shall be treated as a single event of restructuring provided that the revised DCCO is fixed within the respective time limits as stated in above points and all other terms and conditions of the loan remained unchanged.

If deemed fit, NBFCs may extend DCCO beyond the respective time limits quoted at (iii)(a) to (b) above; however, in that case, NBFCs shall not be able to retain the ‘standard’ asset classification status of such loan accounts.

(v)(b) In cases where NBFCs have specifically sanctioned a ‘standby facility’ at the time of initial financial closure to fund cost overruns, they may fund cost overruns as per the agreed terms and conditions.

In cases where the initial financial closure does not envisage such financing of cost overruns, NBFCs have been allowed to fund cost overruns, which may arise on account of extension of DCCO within the time limits quoted at (iii)(a) to (b) above, without treating the loans as ‘restructured asset’ subject to the following conditions:

NBFCs may fund additional ‘Interest During Construction’, which may arise on account of delay in completion of a project;

Other cost overruns (excluding Interest During Construction) up to a maximum of 10% of the original project cost. This ceiling is applicable to financing of all other cost overruns (excluding interest during construction), including cost overruns on account of fluctuations in the value of Indian Rupee against other currencies, arising out of extension of date of commencement of commercial operations;

The Debt Equity Ratio as agreed at the time of initial financial closure shall remain unchanged subsequent to funding cost overruns or

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improve in favour of the lenders and the revised Debt Service Coverage Ratio shall be acceptable to the lenders;

Disbursement of funds for cost overruns shall start only after the Sponsors/Promoters bring in their share of funding of the cost overruns; and

All other terms and conditions of the loan shall remain unchanged or enhanced in favour of the lenders.

(v)(c)(a) In order to facilitate revival of the projects stalled primarily due to inadequacies of the current promoters, it is advised that if a change in ownership takes place any time during the periods quoted in paragraphs 1.3(iii) and 1.3(v) above or before the original DCCO, NBFCs may permit extension of the DCCO of the project up to two years in addition to the periods quoted at paragraph 1.3(iii) and 1.3(v) above, as the case may be, without any change in asset classification of the account subject to the conditions stipulated in the following paragraphs. NBFCs may also consequentially shift/extend repayment schedule, if required, by an equal or shorter duration.

It is clarified that in cases where change in ownership and extension of DCCO (as indicated in paragraph 1.3(v)(c)(a) above) takes place before the original DCCO, and if the project fails to commence commercial operations by the extended DCCO, the project shall be eligible for further extension of DCCO in terms of guidelines quoted at paragraph 1.3(iii) and 1.3(v) above. Similarly, where change in ownership and extension of DCCO takes place during the period quoted in paragraph (1.3)(v) above, the account may still be restructured by extension of DCCO in terms of guidelines quoted at paragraph 1.3(iii) above, without classifying the account as non-performing asset.

The provisions contained in sub para (a) and (b) above are subject to the following conditions:

NBFCs shall establish that implementation of the project is stalled/affected primarily due to inadequacies of the current promoters/management and with a change in ownership there is a very high probability of commencement of commercial operations by the project within the extended period;

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The project in consideration shall be taken-over/acquired by a new promoter/promoter group with sufficient expertise in the field of operation. If the acquisition is being carried out by a special purpose vehicle (domestic or overseas), the NBFC shall be able to clearly demonstrate that the acquiring entity is part of a new promoter group with sufficient expertise in the field of operation;

The new promoters shall own at least 51 per cent of the paid-up equity capital of stake in the acquired project. If the new promoter is a non-resident, and in sectors where the ceiling on foreign investment is less than 51 per cent, the new promoter shall own at least 26 per cent of the paid-up equity capital or up to applicable foreign investment limit, whichever is higher, provided NBFCs are satisfied that with this equity stake the new non-resident promoter controls the management of the project;

Viability of the project shall be established to the satisfaction of the NBFCs.

Intra-group business restructuring/ mergers/ acquisitions and/or takeover/ acquisition of the project by other entities/ subsidiaries/ associates etc. (domestic as well as overseas), belonging to the existing promoter/ promoter group shall not qualify for this facility. The NBFCs shall clearly establish that the acquirer does not belong to the existing promoter group;

Asset classification of the account as on the ‘reference date’ shall continue during the extended period. For this purpose, the ‘reference date’ shall be the date of execution of preliminary binding agreement between the parties to the transaction, provided that the acquisition/takeover of ownership as per the provisions of law/regulations governing such acquisition/takeover is completed within a period of 90 days from the date of execution of preliminary binding agreement. During the intervening period, the usual asset classification norms shall continue to apply. If the change in ownership is not completed within 90 days from the preliminary binding agreement, the ‘reference date’ shall be the effective date of acquisition/ takeover as per the provisions of law/regulations governing such acquisition/ takeover;

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The new owners/ promoters are expected to demonstrate their commitment by bringing in substantial portion of additional monies required to complete the project within the extended time period. As such, treatment of financing of cost overruns for the project shall continue to be subject to the guidelines prescribed in these Directions. Financing of cost overrun beyond the ceiling prescribed in the circular dated January 16, 2015 shall be treated as an event of restructuring even if the extension of DCCO is within the limits prescribed above;

While considering the extension of DCCO (up to an additional period of 2 years) for the benefits envisaged hereinabove, NBFCs shall make sure that the repayment schedule does not extend beyond 85 per cent of the economic life/concession period of the project; and

This facility shall be available to a project only once and will not be available during subsequent change in ownership, if any.

Loans covered under this guideline shall attract provisioning as per the extant provisioning norms depending upon their asset classification status.

In case of infrastructure projects under implementation, where Appointed Date (as defined in the concession agreement) is shifted due to the inability of the Concession Authority to comply with the requisite conditions, change in date of commencement of commercial operations (DCCO) shall not be treated as 'restructuring', subject to following conditions :

The project is an infrastructure project under public private partnership model awarded by a public authority;

The loan disbursement is yet to begin;

The revised date of commencement of commercial operations is documented by way of a supplementary agreement between the borrower and lender and;

Project viability has been reassessed and sanction from appropriate authority has been obtained at the time of supplementary agreement.

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1.4. Project Loans for Non-Infrastructure Sector (Other than Commercial Real Estate Exposures)

A loan for a non-infrastructure project shall be classified as NPA during any time before commencement of commercial operations as per record of recovery, unless it is restructured and becomes eligible for classification as 'standard asset' in terms of paras (iii) to (iv) below.

A loan for a non-infrastructure project shall be classified as NPA if it fails to commence commercial operations within one year from the original DCCO, even if is regular as per record of recovery, unless it is restructured and becomes eligible for classification as 'standard asset' in terms of paras

to (iv) below.

In case of non-infrastructure projects, if the delay in commencement of commercial operations extends beyond the period of one year from the date of completion as determined at the time of financial closure, NBFCs can prescribe a fresh DCCO, and retain the "standard" classification by undertaking restructuring of accounts, provided the fresh DCCO does not extend beyond a period of two years from the original DCCO. This among others shall also imply that the restructuring application is received before the expiry of one year from the original DCCO, and when the account is still "standard" as per the record of recovery.

The other conditions applicable shall be:

In cases where there is moratorium for payment of interest, NBFCs shall not book income on accrual basis beyond one year from the original DCCO, considering the high risk involved in such restructured accounts.

NBFCs shall maintain following provisions on such accounts as long as these are classified as standard assets apart from provision for diminution in fair value due to extension of DCCO :

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Particulars Provisioning Requirement

If the revised DCCO is * 0.25 per cent

within one year from the

originalDCCOprescribed

at the time of financial

closure

If the DCCO is extended Project loans restructured with effect from

beyond one year and upto January 24, 2014 :

two years from the original

* 5.00 per cent – From the date of restructuring

DCCO prescribed at the for 2 years

time of financial closure

Stock of Project loans classified as

restructured as on January 23, 2014 :

2.75 per cent - with effect from March 31, 2014

3.50 per cent - with effect from March 31, 2015 (spread over the four quarters of 2014-15)

4.25 per cent - with effect from March 31, 2016 (spread over the four quarters of 2015-16)

5 per cent - with effect from March 31,

2017 (spread over the four quarters of

2016-17).

The above provisions will be applicable from the date of restructuring for 2 years.

For the purpose of these guidelines, mere extension of DCCO shall not be considered as restructuring, if the revised DCCO falls within the period of one year from the original DCCO. In such cases the consequential shift in repayment period by equal or shorter duration (including the start date and end date of revised repayment schedule) than the extension of DCCO shall also not be considered as restructuring provided all other terms and conditions of the loan remain unchanged.

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As such project loans shall be treated as standard assets in all respects, they shall attract standard asset provision of 0.25 per cent.

(iv)(a) Multiple revisions of the DCCO and consequential shift in repayment schedule for equal or shorter duration (including the start date and end date of revised repayment schedule) shall be treated as a single event of restructuring provided that the revised DCCO is fixed within the respective time limits as stated in above points and all other terms and conditions of the loan remained unchanged.

(iv)(b) In cases where NBFCs have specifically sanctioned a ‘standby facility’ at the time of initial financial closure to fund cost overruns, they may fund cost overruns as per the agreed terms and conditions.

NBFCs may fund additional ‘Interest During Construction’, which may arise on account of delay in completion of a project;

Other cost overruns (excluding Interest During Construction) up to a maximum of 10 per cent of the original project cost. This ceiling is applicable to financing of all other cost overruns (excluding interest during construction), including cost overruns on account of fluctuations in the value of Indian Rupee against other currencies, arising out of extension of date of commencement of commercial operations;

The Debt Equity Ratio as agreed at the time of initial financial closure shall remain unchanged subsequent to funding cost overruns or improve in favour of the lenders and the revised Debt Service Coverage Ratio shall be acceptable to the lenders;

Disbursement of funds for cost overruns shall start only after the Sponsors/Promoters bring in their share of funding of the cost overruns; and

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All other terms and conditions of the loan shall remain unchanged or enhanced in favour of the lenders.

(iv)(c)(a) In order to facilitate revival of the projects stalled primarily due to inadequacies of the current promoters, it is advised that if a change in ownership takes place any time during the periods quoted in paragraphs 1.4(iii) and 1.4(iv) above or before the original DCCO, NBFCs may permit extension of the DCCO of the project up to two years in addition to the periods quoted at paragraph 1.4(iii) and 1.4(iv) above, as the case may be, without any change in asset classification of the account subject to the conditions stipulated in the following paragraphs. NBFCs may also consequentially shift/extend repayment schedule, if required, by an equal or shorter duration.

It is clarified that in cases where change in ownership and extension of DCCO (as indicated in paragraph 1.4(iv)(c)(a) above) takes place before the original DCCO, and if the project fails to commence commercial operations by the extended DCCO, the project will be eligible for further extension of DCCO in terms of guidelines quoted at paragraph 1.4(iii) and 1.4(iv) above. Similarly, where change in ownership and extension of DCCO takes place during the period quoted in paragraph 1.4(iv) above, the account may still be restructured by extension of DCCO in terms of guidelines quoted at paragraph 1.4(iii) above, without classifying the account as non-performing asset.

The provisions contained in sub para (a) and (b) above are subject to the following conditions:

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entity is part of a new promoter group with sufficient expertise in the field of operation;

Viability of the project shall be established to the satisfaction of the NBFCs.

Intra-group business restructuring/mergers/acquisitions and/or takeover/ acquisition of the project by other entities/subsidiaries/associates etc. (domestic as well as overseas), belonging to the existing promoter/promoter group shall not qualify for this facility. The NBFCs shall clearly establish that the acquirer does not belong to the existing promoter group;

Asset classification of the account as on the ‘reference date’ would continue during the extended period. For this purpose, the ‘reference date’ would be the date of execution of preliminary binding agreement between the parties to the transaction, provided that the acquisition/takeover of ownership as per the provisions of law/regulations governing such acquisition/takeover is completed within a period of 90 days from the date of execution of preliminary binding agreement. During the intervening period, the usual asset classification norms would continue to apply. If the change in ownership is not completed within 90 days from the preliminary binding agreement, the ‘reference date’ shall be the effective date of acquisition/ takeover as per the provisions of law/regulations governing such acquisition/ takeover;

141

the circular dated January 16, 2015 shall be treated as an event of restructuring even if the extension of DCCO is within the limits prescribed above;

This facility shall be available to a project only once and shall not be available during subsequent change in ownership, if any.

Loans covered under this guideline shall attract provisioning as per the extant provisioning norms depending upon their asset classification status.

1.5. Other Issues

Any change in the repayment schedule of a project loan caused due to an increase in the project outlay on account of increase in scope and size of the project, shall not be treated as restructuring if:

The increase in scope and size of the project takes place before commencement of commercial operations of the existing project.

The rise in cost excluding any cost-overrun in respect of the original project is 25 per cent or more of the original outlay.

The NBFC re-assesses the viability of the project before approving the enhancement of scope and fixing a fresh DCCO.

On re-rating, (if already rated) the new rating is not below the previous rating by more than one notch.

Project Loans for Commercial Real Estate

For CRE projects mere extension of DCCO shall not be considered as restructuring, if the revised DCCO falls within the period of one year from the original DCCO and there is no change in other terms and conditions except possible shift of the repayment schedule and servicing of the loan by equal or shorter duration compared to the period by which DCCO has been extended. Such CRE project loans shall be treated as standard assets in all respects for this purpose without attracting the higher provisioning applicable for restructured standard assets. However, the asset classification benefit shall not be available to CRE projects if they are restructured.

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In all the above cases of restructuring where regulatory forbearance has been extended, the Boards of NBFCs shall satisfy themselves about the viability of the project and the restructuring plan.

1.6. Income recognition

NBFCs shall recognise income on accrual basis in respect of the projects under implementation, which are classified as 'standard'.

NBFCs shall not recognise income on accrual basis in respect of the projects under implementation which are classified as a 'substandard' asset. NBFCs shall recognise income in such accounts only on realisation on cash basis.

Consequently, NBFCs which have wrongly recognised income in the past shall reverse the interest if it was recognised as income during the current year or make a provision for an equivalent amount if it was recognised as income in the previous year(s). As regards the regulatory treatment of 'funded interest' recognised as income and 'conversion into equity, debentures or any other instrument' NBFCs shall adopt the following:

Funded Interest: Income recognition in respect of the NPAs, regardless of whether these are or are not subjected to restructuring / rescheduling / renegotiation of terms of the loan agreement, shall be done strictly on cash basis, only on realisation and not if the amount of interest overdue has been funded. If, however, the amount of funded interest is recognised as income, a provision for an equal amount shall also be made simultaneously. In other words, any funding of interest in respect of NPAs, if recognized as income, shall be fully provided for.

Conversion into equity, debentures or any other instrument: The amount outstanding converted into other instruments shall normally comprise principal and the interest components. If the amount of interest dues is converted into equity or any other instrument, and income is recognised in consequence, full provision shall be made for the amount of income so recognised to offset the effect of such income recognition. Such provision shall be in addition to the amount of provision that may be necessary for the depreciation in the value of the equity or other instruments as per the valuation norms. However, if the conversion of interest is into equity which is quoted, interest income can be recognised at market value of equity, as on the date of conversion, not exceeding the amount of interest converted to equity. Such equity must

143

thereafter be classified ''current investment" category and valued at lower of cost or market value. In case of conversion of principal and /or interest in respect of NPAs into debentures, such debentures shall be treated as NPA, ab initio, in the same asset classification as was applicable to loan just before conversion and provision made as per norms. This norm shall also apply to zero coupon bonds or other instruments which seek to defer the liability of the issuer. On such debentures, income shall be recognised only on realisation basis. The income in respect of unrealised interest which is converted into debentures or any other fixed maturity instrument shall be recognised only on redemption of such instrument. Subject to the above, the equity shares or other instruments arising from conversion of the principal amount of loan shall also be subject to the usual prudential valuation norms as applicable to such instruments.

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Annex XI

Self–Regulatory Organization (SRO) for NBFC-MFIs – Criteria for Recognition

The SRO shall have at least 1/3rd of the NBFC-MFIs registered as its members, at the time of recognition.

It shall have adequate capital to be able to discharge its functions without being overly dependent on subscription from members.

The memorandum / bye laws of the Self-Regulatory Organization (SRO)shall specify criteria for admission of members and the functions it shall discharge, as one of its main objects;

The Memorandum / bye laws of an SRO shall provide for the manner in which the Governing Body / Board of Directors of the SRO would function.

The Board shall have adequate representation from both large and small NBFC-MFIs.

1/3rd of the Board of Directors shall be independent and not associated with member institutions.

The Board of Directors and individuals comprising the management shall be considered fit and proper, by the Reserve Bank.

It shall have adequate internal controls in place.

The SRO shall function in the interest of all the stake holders and not seen to be only an industry body.

The SRO shall frame a Code of Conduct to be followed by its members.

It shall have a Grievance Redressal Mechanism and a Dispute Resolution Mechanism in place, including a specially appointed Grievance Redressal Nodal Officer.

It shall be in a position to exercise surveillance over its members to ensure compliance with the Code of Conduct and regulatory prescriptions of the Bank through an Enforcement Committee

It shall also have a developmental function of training and awareness programmes for its members, for the Self Help Groups and conduct research and development for the growth of the MFI sector

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Obligations of the SRO towards the Reserve Bank

The SRO, once recognized, shall need to nominate a Compliance officer who shall directly report to the Reserve Bank and who shall keep the Reserve Bank regularly posted of all developments in the sector.

The SRO shall have to submit its Annual Report to the Reserve Bank.

It shall have to conduct investigation into areas of concern as pointed out by the Reserve Bank.

The SRO shall inform the Reserve Bank of the violations of the provisions of the RBI Act, 1934, the directions, the circulars or the guidelines issued by the Reserve Bank from time to time, by any of its members.

It shall provide information, including data, to the Reserve Bank periodically or as requested for by the Bank.

The Reserve Bank shall, if need arises, inspect the books of the SRO or arrange to have the books inspected by an audit firm.

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Annex XII

Annex XII(1)

INFORMATION ABOUT THE PROPOSED PROMOTERS/ DIRECTORS/

SHAREHOLDERS OF THE COMPANY

Sr.Particulars RequiredResponse

No.

1Name

2DesignationChairman/ Managing

Director/ Director/ Chief

Executive Officer

3Nationality

4Age (to be substantiated with date of birth)

5Business Address

6Residential Address

7E-mail address / Telephone number

8PAN Number under Income Tax Act

9Director Identification Number (DIN)

10Social security number / Passport No.*

11Educational / professional qualifications

12Professional Achievement relevant to the job

13Line of business or vocation

14Any other information relevant to the

Company

15Name/s of other companies in which the

person has held the post of Chairman /

Managing Director/ Director / Chief

Executive Officer

16Name/softheregulators

(RBI,SEBI,IRDA,PFRDA,NHB or any other

foreign regulator) of the entities mentioned in

which the persons hold directorships

17Name/s of the NBFCs, if any, with which the

person is associated as Promoter, Managing

Director, Chairman or Director including a

Residuary Non-Banking Financial Company,

which has been prohibited from accepting

deposits/ prosecuted by RBI ?

18Detail of prosecution, if any, pending or

commenced or resulting in conviction in the

past against the person and/or against any of

the entities he is associated with for violation

of economic laws and regulations

19Cases, if any, where the person or relatives of

the person or the companies in which the

person is associated with, are in default or

have been in default in the last 5 years in

respect of credit facilities obtained from any

entity or bank

20If the person is a member of a professional

association/ body, details of disciplinary

action, ifany, pending or commenced or

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resulting in conviction in the past against him

/ her or whether he / she has been banned

from entry of any professional occupation at

any time

21Whether the person attracts any of the

disqualification envisaged under section 164

of the Companies Act, 2013

22Has the person or any of the companies, he/

she is associated with, been subject to any

investigation at the instance of the

Government Department or Agency

23Has the person at any time been found guilty

of violations of rules / regulations / legislative

requirements by Customs / Excise / Income

Tax// Foreign Exchange / Other Revenue

Authorities, if so, give particulars

24Experience in the business of NBFC (number

of years)

25Equity shareholding in the company

(i) No. of shares ……………………………

(ii) Face value ₹………………………..

(iii) Percentage to total paid up equity share ……………………………

capital of the company

26Name/s of the companies, firms and

proprietary concerns in which the person

holds substantial interest

27Names of the principal bankers to the

concerns at 26 above

28Names of the overseas bankers *

29Whether number of directorships held by the

person exceeds the limits prescribed under

section 165 of the Companies Act, 2013

Signature :

Date :Name :

Place:Designation :

Company Seal :

* For foreign promoters / directors / shareholders Note: (i) Separate form shall be submitted in respect of each of the proposed promoters/ directors/ shareholders

Annex XII(2)

INFORMATION ABOUT CORPORATE PROMOTER

Sr.Particulars RequiredResponse

No.

1Name

2Business Address

3E-mail address / Telephone number

4PAN Number under Income Tax Act

5Name and contact details of compliance officer

6Line of business

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7The details of their major shareholders (more than 10%)

and line of activity, if corporates

8Names of the principal bankers/ overseas bankers *

9Name/softheregulators

(RBI,SEBI,IRDA,PFRDA,NHB or any other foreign

regulator)

10Name/s of Company/ies in the Group as defined in the

Prudential Norms Directions

11Name/s of the company/ies in the Group that are

NBFCs

12Specify the names of companies in the group which

have been prohibited from accepting deposits/

prosecuted by RBI?

13Detail of prosecution, if any, pending or commenced or

resulting in conviction in the past against the corporate

for violation of economic laws and regulations

14Cases, if any, where the corporate, is in default or have

been in default in the last 5 years in respect of credit

facilities obtained from any entity or bank

15Whether the corporate has been subject to any

investigation at the instance of the Government

Department or Agency

16Has the Corporate at any time been found guilty of

violations of rules/ regulations/ legislative requirements

by Customs/ Excise/ Income Tax// Foreign Exchange/

Other Revenue Authorities, if so, give particulars

17Has the promoter corporate/ majority shareholder of the

promoter corporate, if a corporate, ever applied to RBI

for CoR which has been rejected

Signature :

Date :Name :

Place:Designation :

Company Seal :

* Forforeign corporate

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Annex XIII

‘Fit and Proper’ Criteria for directors of NBFCs

Reserve Bank had issued a Directive in June 2004 to banks on undertaking due diligence on the persons before appointing them on the Boards of banks based on the ‘Report of the Consultative Group of directors of Banks / Financial Institutions’. Specific ‘fit and proper’ criteria to be fulfilled by the directors were also advised.

The importance of due diligence of directors to ascertain suitability for the post by way of qualifications, technical expertise, track record, integrity, etc. needs no emphasis for any financial institution. It is proposed to follow the same guidelines mutatis mutandis in case of NBFCs also. While the Reserve Bank does carry out due diligence on directors before issuing Certificate of Registration to an NBFC, it is necessary that NBFCs put in place an internal supervisory process on a continuing basis. Further, in order to streamline and bring in uniformity in the process of due diligence, while appointing directors, NBFCs shall ensure that the procedures mentioned below are followed and minimum criteria fulfilled by the persons before they are appointed on the Boards:

(a) NBFCs shall undertake a process of due diligence to determine the suitability of the person for appointment / continuing to hold appointment as a director on the Board, based upon qualification, expertise, track record, integrity and other ‘fit and proper’ criteria. NBFCs shall obtain necessary information and declaration from the proposed / existing directors for the purpose in the format given at Annex XIV.

(b) The process of due diligence shall be undertaken by the NBFCs at the time of appointment / renewal of appointment.

(d) Based on the information provided in the signed declaration, Nomination Committees shall decide on the acceptance or otherwise of the directors, where considered necessary.

(e) NBFCs shall obtain annually as on 31st March a simple declaration from the directors that the information already provided has not undergone change and where there is any change, requisite details are furnished by them forthwith.

(f) The Board of the NBFC must ensure in public interest that the nominated/ elected directors execute the deeds of covenants in the format given in Annex XV.

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Annex XIV

Name of NBFC: ________________________

Declaration and Undertaking by Director (with enclosures as

appropriate as on )

Personal details of director

Full name

Date of Birth

Educational Qualifications

Relevant Background and Experience

Permanent Address

Present Address

E-mail Address / Telephone Number

Permanent Account Number under the Income Tax Act and name and address of Income Tax Circle

Relevant knowledge and experience

Any other information relevant to Directorship of the

NBFC

Relevant Relationships of director

List of Relatives if any who are connected with the NBFC (Refer section 6 and Schedule 1A of the Companies Act, 1956 and corresponding provisions of New Companies Act, 2013)

List of entities if any in which he/she is considered as being interested (Refer section 299(3)(a) and section 300 of the Companies Act, 1956 and corresponding provisions of New Companies Act, 2013)

List of entities in which he/she is considered as holding

substantial interest within the meaning of prudential norms as prescribed in these Directions.

Name of NBFC in which he/she is or has been a member

of the board (giving details of period during which such office was held)

Fund and non-fund facilities, if any, presently availed of

by him/her and/or by entities listed in II (b) and (c) above

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from the NBFC

Cases, if any, where the director or entities listed in II (b) and (c) above are in default or have been in default in the past in respect of credit facilities obtained from the NBFC or any other NBFC / bank.

III Records of professional achievements

Relevant professional achievements

IV. Proceedings, if any, against the director

a. If the director is a member of a professional association/body, details of disciplinary action, if any, pending or commenced or resulting in conviction in the past against him/her or whether he/she has been banned from entry into any profession/ occupation at any time.

b. Details of prosecution, if any, pending or commenced or resulting in conviction in the past against the director and/or against any of the entities listed in II (b) and (c) above for violation of economic laws and regulations

Details of criminal prosecution, if any, pending or

commenced or resulting in conviction in the last five years against the director

Whether the director attracts any of the disqualifications envisaged under section 274 of the Companies Act 1956 and corresponding provisions of New Companies Act, 2013?

Has the director or any of the entities at II (b) and (c)

above been subject to any investigation at the instance of Government department or agency?

Has the director at any time been found guilty of violation of rules/regulations/ legislative requirements by customs/ excise /income tax/foreign exchange /other revenue authorities, if so give particulars

Whether the director has at any time come to the adverse

notice of a regulator such as SEBI, IRDA, MCA.

(Though it shall not be necessary for a candidate to

152

mention in the column about orders and findings

made by the regulators which have been later on

reversed/set aside in to, it would be necessary to

make a mention of the same, in case the

reversal/setting aside is on technical reasons like

limitation or lack of jurisdiction, etc and not on merit,

If the order of the regulator is temporarily stayed and

the appellate/ court proceedings are pending, the

same also should be mentioned.)

Any other explanation / information in regard to items I

V.to III andotherinformationconsidered relevant for

judging fit and proper

Undertaking

I confirm that the above information is to the best of my knowledge

and belief true and complete. I undertake to keep the NBFC fully

informed, as soon as possible, of all events which take place

subsequent to my appointment which are relevant to the information

provided above.

I also undertake to execute the deed of covenant required to be

executed by all directors of the NBFC.

Place :Signature

Date :

VI.RemarksofChairmanofNomination

Committee/Board of Directors of NBFC

Place :Signature

Date:

153

Annex XV

Form of Deed of Covenants with a Director of an NBFC

THIS DEED OF COVENANTS is made this ______ day of ________Two thousand

_____ BETWEEN _______________, having its registered office at ____________

(hereinafter a deposit taking NBFC and a non-deposit taking NBFC with asset size of ₹500 crore and above being called the “NBFC") of the one part and Mr / Ms_____________ of ______________ (hereinafter called the "Director") of the

other part.

WHEREAS

A. The director has been appointed as a director on the Board of Directors of the NBFC (hereinafter called "the Board") and is required as a term of his / her appointment to enter into a Deed of Covenants with the NBFC.

B. The director has agreed to enter into this Deed of Covenants, which has been approved by the Board, pursuant to his said terms of appointment.

NOW IT IS HEREBY AGREED AND THIS DEED OF COVENANTS WITNESSETH AS FOLLOWS:

The director acknowledges that his / her appointment as director on the Board of the NBFC is subject to applicable laws and regulations including the Memorandum and Articles of Association of the NBFC and the provisions of this Deed of Covenants.

The director covenants with the NBFC that:

The director shall disclose to the Board the nature of his / her interest, direct or indirect, if he / she has any interest in or is concerned with a contract or arrangement or any proposed contract or arrangement entered into or to be entered into between the NBFC and any other person, immediately upon becoming aware of the same or at meeting of the Board at which the question of entering into such contract or arrangement is taken into consideration or if the director was not at the date of that meeting concerned or interested in such proposed contract or arrangement, then at the first meeting of the Board held after he / she becomes so concerned or interested and in case of any other contract or arrangement, the required disclosure shall be made at the first meeting of the Board held after the director becomes concerned or interested in the contract or arrangement.

154

The director shall disclose by general notice to the Board his / her other directorships, his / her memberships of bodies corporate, his / her interest in other entities and his / her interest as a partner or proprietor of firms and shall keep the Board apprised of all changes therein.

The director shall provide to the NBFC a list of his / her relatives as defined in the Companies Act, 1956 or 2013 and to the extent the director is aware of directorships and interests of such relatives in other bodies corporate, firms and other entities.

The director shall in carrying on his / her duties as director of the NBFC:

use such degree of skill as may be reasonable to expect from a person with his / her knowledge or experience;

in the performance of his / her duties take such care as he / she might be reasonably expected to take on his / her own behalf and exercise any power vested in him / her in good faith and in the interests of the NBFC;

shall keep himself / herself informed about the business, activities and financial status of the NBFC to the extent disclosed to him / her;

attend meetings of the Board and Committees thereof (collectively for the sake of brevity hereinafter referred to as "Board") with fair regularity and conscientiously fulfil his / her obligations as director of the NBFC;

shall not seek to influence any decision of the Board for any consideration other than in the interests of the NBFC;

shall bring independent judgment to bear on all matters affecting the NBFC brought before the Board including but not limited to statutory compliances, performance reviews, compliances with internal control systems and procedures, key executive appointments and standards of conduct;

shall in exercise of his / her judgement in matters brought before the Board or entrusted to him / her by the Board be free from any business or other relationship which could materially interfere with the exercise of his / her independent judgement; and

shall express his / her views and opinions at Board meetings without any fear or favour and without any influence on exercise of his / her independent judgement;

The director shall have:

fiduciary duty to act in good faith and in the interests of the NBFC and not for any collateral purpose;

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duty to act only within the powers as laid down by the NBFC’s Memorandum and Articles of Association and by applicable laws and regulations; and

duty to acquire proper understanding of the business of the NBFC.

The director shall :

not evade responsibility in regard to matters entrusted to him / her by the Board;

not interfere in the performance of their duties by the whole-time directors and other officers of the NBFC and wherever the director has reasons to believe otherwise, he / she shall forthwith disclose his / her concerns to the Board; and

not make improper use of information disclosed to him / her as a member of the Board for his / her or someone else’s advantage or benefit and shall use

the information disclosed to him / her by the NBFC in his / her capacity as director of the NBFC only for the purposes of performance of his / her duties as a director and not for any other purpose.

The NBFC covenants with the director that:

(i) the NBFC shall apprise the director about:

Board procedures including identification of legal and other duties of Director and required compliances with statutory obligations;

control systems and procedures;

voting rights at Board meetings including matters in which Director should not participate because of his / her interest, direct or indirect therein;

qualification requirements and provide copies of Memorandum and Articles of Association;

corporate policies and procedures;

insider dealing restrictions;

constitution of, delegation of authority to and terms of reference of various committees constituted by the Board;

appointments of Senior Executives and their authority;

remuneration policy,

deliberations of committees of the Board, and

communicate any changes in policies, procedures, control systems, applicable regulations including Memorandum and Articles of Association of the NBFC, delegation of authority, Senior Executives, etc. and appoint the

156

compliance officer who shall be responsible for all statutory and legal compliance.

the NBFC shall disclose and provide to the Board including the director all information which is reasonably required for them to carry out their functions and duties as a director of the NBFC and to take informed decisions in respect of matters brought before the Board for its consideration or entrusted to the director by the Board or any committee thereof;

the disclosures to be made by the NBFC to the directors shall include but not be limited to the following :

all relevant information for taking informed decisions in respect of matters brought before the Board;

NBFC’s strategic and business plans and forecasts;

organisational structure of the NBFC and delegation of authority;

corporate and management controls and systems including procedures;

economic features and marketing environment;

information and updates as appropriate on NBFC’s products;

information and updates on major expenditure;

periodic reviews of performance of the NBFC; and

report periodically about implementation of strategic initiatives and plans;

the NBFC shall communicate outcome of Board deliberations to directors and concerned personnel and prepare and circulate minutes of the meeting of Board to directors in a timely manner and to the extent possible within two business days of the date of conclusion of the Board meeting; and

advise the director about the levels of authority delegated in matters placed before the Board.

4. The NBFC shall provide to the director periodic reports on the functioning of internal control system including effectiveness thereof.

5. The NBFC shall appoint a compliance officer who shall be a Senior executive reporting to the Board and be responsible for setting forth policies and procedures and shall monitor adherence to the applicable laws and regulations and policies and procedures including but not limited to directions of Reserve Bank of India and other concerned statutory and governmental authorities.

6. The director shall not assign, transfer, sublet or encumber his / her office and his / her rights and obligations as director of the NBFC to any third party provided that

157

nothing herein contained shall be construed to prohibit delegation of any authority, power, function or delegation by the Board or any committee thereof subject to applicable laws and regulations including Memorandum and Articles of Association of the NBFC.

7.The failure on the part of either party hereto to perform, discharge, observe or comply with any obligation or duty shall not be deemed to be a waiver thereof nor shall it operate as a bar to the performance, observance, discharge or compliance thereof at any time or times thereafter.

Any and all amendments and / or supplements and / or alterations to this Deed of Covenants shall be valid and effectual only if in writing and signed by the director and the duly authorised representative of the NBFC.

This Deed of Covenants has been executed in duplicate and both the copies shall be deemed to be originals.

IN WITNESS WHEREOF THE PARTIES HAVE DULY EXECUTED THIS AGREEMENT ON THE DAY, MONTH AND YEAR FIRST ABOVE WRITTEN.

For the NBFCDirector

By …………………..

Name:Name:

Title:

In the presence of:

1.2. …………………….

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Annex XVI

Indicative List of Balance Sheet Disclosure for non-deposit taking NBFCs with

Asset Size ₹500 Crore and Above and Deposit Taking NBFCs (hereinafter

called as Applicable NBFCs)

1. Minimum Disclosures

At a minimum, the items listed in this Annex shall be disclosed in the NTA by all applicable NBFCs. The disclosures listed are intended only to supplement, and not to replace, other disclosure requirements as applicable.

2. Summary of Significant Accounting Policies

Applicable NBFCs shall disclose the accounting policies regarding key areas of operations at one place along with NTA in their financial statements. A suggestive list includes - Basis of Accounting, Transactions involving Foreign Exchange, Investments - Classification, Valuation, etc., Advances and Provisions thereon, Fixed Assets and Depreciation, Revenue Recognition, Employee Benefits, Provision for Taxation, Net Profit, etc.

3.1 Capital

(Amount in ₹ crore)

ParticularsCurrentPrevious

YearYear

i)CRAR (%)

ii)CRAR - Tier I Capital (%)

iii)CRAR - Tier II Capital (%)

iv)Amount of subordinated debt

raised as Tier-II capital

v)Amount raised by issue of

Perpetual Debt Instruments

159

3.2 Investments

(Amount in ₹ crore)

ParticularsCurrentPrevious

YearYear

(1)Value of Investments

(i)Gross Value of Investments

(a)In India

(b)Outside India,

(ii)Provisions for Depreciation

(a)In India

(b)Outside India,

(iii)NetValue of Investments

(a)In India

(b)Outside India.

(2)Movement of provisions held towards

depreciation on investments.

(i)Opening balance

(ii)Add : Provisions made during the

year

(iii)Less : Write-off / write-back of

excess provisions during the year

(iv)Closing balance

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3.3 Derivatives

3.3.1 Forward Rate Agreement / Interest Rate Swap

(Amount in ₹ crore)

Particulars Current Previous

YearYear

(i) The notional principal of swap agreements

Losses which would be incurred if

counterparties failed to fulfil their obligations under the agreements

Collateral required by the applicable NBFC

upon entering into swaps

Concentration of credit risk arising from the swaps $

The fair value of the swap book @

Note: Nature and terms of the swaps including information on credit and market risk and the accounting policies adopted for recording the swaps should also be disclosed.

$ Examples of concentration could be exposures to particular industries or swaps with highly geared companies.

If the swaps are linked to specific assets, liabilities, or commitments, the fair value would be the estimated amount that the applicable NBFC would receive or pay to terminate the swap agreements as on the balance sheet date.

161

3.3.2 Exchange Traded Interest Rate (IR) Derivatives

(Amount in ₹ crore)

S. Particulars Amount

No.

(i) Notional principal amount of exchange traded IR

derivatives undertaken during the year (instrument-

wise)

(ii) Notional principal amount of exchange traded IR

derivatives outstanding as on 31st March …..

(instrument-wise)

(iii) Notional principal amount of exchange traded IR

derivatives outstanding and not "highly effective"

(instrument-wise)

(iv) Mark-to-market value of exchange traded IR

derivatives outstanding and not "highly effective"

(instrument-wise)

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3.3.3 Disclosures on Risk Exposure in Derivatives Qualitative Disclosure

Applicable NBFCs shall describe their risk management policies pertaining to derivatives with particular reference to the extent to which derivatives are used, the associated risks and business purposes served. The discussion shall also include:

the structure and organization for management of risk in derivatives trading,

the scope and nature of risk measurement, risk reporting and risk monitoring systems,

policies for hedging and / or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges / mitigants, and

accounting policy for recording hedge and non-hedge transactions; recognition of income, premiums and discounts; valuation of outstanding contracts; provisioning, collateral and credit risk mitigation.

Quantitative Disclosures

(Amount in ₹ crore)

Sl. Particular Currency Interest Rate

No. Derivatives Derivatives

(i) Derivatives (Notional Principal Amount)

For hedging

(ii)Marked to Market Positions [1]

a)Asset (+)

b)Liability (-)

(iii)Credit Exposure [2]

(iv)Unhedged Exposures

3.4 Deleted

163

3.5 Asset Liability Management Maturity pattern of certain items of Assets and Liabilities

1 to8 to15OverOverOverOverOver

714daysOver 23613

daysdaysto1monthsmonthMonthyearyearsOver

30monthupto 3& up& up& up& up5Total

/31upto 2monthsto 6to 1to 3to 5years

daysMonthmonthyearyearsyears

Deposits

Advances

Investments

Borrowings

Foreign

Currency

assets

Foreign

Currency

liabilities

3.6 Exposures

3.6.1 Exposure to Real Estate Sector

(Amount in ₹ crore)

CategoryCurrentPrevious

YearYear

Direct Exposure

Residential Mortgages -

Lending fully secured by mortgages on residential property that is or will be occupied by the borrower or that is rented

Commercial Real Estate -

Lending secured by mortgages on commercial real estates (office buildings, retail space, multi-purpose commercial premises, multi-family residential buildings,

164

(Amount in ₹ crore)

Category Current Previous

YearYear

multi-tenanted commercial premises, industrial or warehouse space, hotels, land acquisition, development and construction, etc.). Exposure shall also include non-fund based limits

(iii) Investments in Mortgage Backed Securities (MBS) and other securitised

exposures -

a.Residential

b.Commercial Real Estate

Total Exposure to Real Estate Sector

3.6.2

Exposure to Capital Market

(Amount in ₹ crore)

ParticularsCurrent Previous

YearYear

direct investment in equity shares, convertible bonds, convertible debentures and units of equity-oriented mutual funds the corpus of which is not exclusively invested in corporate debt;

advances against shares / bonds / debentures or other securities or on clean basis to individuals for investment in shares (including IPOs / ESOPs), convertible bonds, convertible debentures, and units of equity-oriented mutual funds;

advances for any other purposes where shares or convertible bonds or convertible debentures or units of equity oriented mutual funds are taken as primary security;

advances for any other purposes to the extent

165

(Amount in ₹ crore)

Particulars Current Previous

YearYear

secured by the collateral security of shares or convertible bonds or convertible debentures or units of equity oriented mutual funds i.e. where the primary security other than shares / convertible bonds / convertible debentures / units of equity oriented mutual funds 'does not fully cover the advances;

secured and unsecured advances to

stockbrokers and guarantees issued on behalf of stockbrokers and market makers;

loans sanctioned to corporates against the security of shares / bonds / debentures or other securities or on clean basis for meeting promoter's contribution to the equity of new companies in anticipation of raising resources; bridge loans to companies against expected

equity flows / issues;

all exposures to Venture Capital Funds (both registered and unregistered)

Total Exposure to Capital Market

3.6.3 Details of financing of parent company products

3.6.4 Details of Single Borrower Limit (SGL) / Group Borrower Limit (GBL) exceeded by the applicable NBFC

The applicable NBFC shall make appropriate disclosure in the NTA to the annual financial statements in respect of the exposures where the applicable NBFC had exceeded the prudential exposure limits during the year. The sanctioned limit or entire outstanding, whichever is high, shall be reckoned for exposure limit.

3.6.5 Unsecured Advances

For determining the amount of unsecured advances the rights, licenses, authorisations, etc., charged to the applicable NBFCs as collateral in respect of

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projects (including infrastructure projects) financed by them, shall not be reckoned as tangible security. Hence such advances shall be reckoned as unsecured.

Applicable NBFCs shall also disclose the total amount of advances for which intangible securities such as charge over the rights, licenses, authority, etc. has been taken as also the estimated value of such intangible collateral. The disclosure shall be made under a separate head in NTA. This would differentiate such loans from other entirely unsecured loans.

4. Miscellaneous

4.1 Registration obtained from other financial sector regulators

4.2 Disclosure of Penalties imposed by RBI and other regulators

Consistent with the international best practices in disclosure of penalties imposed by the regulators, placing the details of the levy of penalty on the applicable NBFC in public domain will be in the interests of the investors and depositors. Further, strictures or directions on the basis of inspection reports or other adverse findings shall also be placed in the public domain. The penalties shall also be disclosed in the NTA.

4.3 Related Party Transactions

Details of all material transactions with related parties shall be disclosed in the annual report

The company shall disclose the policy on dealing with Related Party Transactions on its website and also in the Annual Report.

4.4 Ratings assigned by credit rating agencies and migration of ratings during the year

4.5 Remuneration of Directors

All pecuniary relationship or transactions of the non-executive directors vis-à-vis the company shall be disclosed in the Annual Report.

4.6 Management

As part of the directors’ report or as an addition thereto, a Management Discussion and Analysis report should form part of the Annual Report to the shareholders. This Management Discussion & Analysis shall include discussion on the following matters within the limits set by the company’s competitive position: a) Industry structure and developments.

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Opportunities and Threats.

Segment–wise or product-wise performance.

Outlook

Risks and concerns.

Internal control systems and their adequacy.

Discussion on financial performance with respect to operational performance.

Material developments in Human Resources / Industrial Relations front, including number of people employed.

4.7 Net Profit or Loss for the period, prior period items and changes in accounting policies

Since the format of the profit and loss account of applicable NBFCs does not specifically provide for disclosure of the impact of prior period items on the current year's profit and loss, such disclosures, wherever warranted, shall be made in the NTA.

4.8 Revenue Recognition

An enterprise shall also disclose the circumstances in which revenue recognition has been postponed pending the resolution of significant uncertainties.

4.9 Consolidated Financial Statements (CFS)

Applicable NBFCs may be guided by general clarifications issued by ICAI from time to time. A parent company, presenting the CFS, shall consolidate the financial statements of all subsidiaries - domestic as well as foreign. The reasons for not consolidating a subsidiary shall be disclosed in the CFS. The responsibility of determining whether a particular entity shall be included or not for consolidation would be that of the Management of the parent entity. In case, its Statutory Auditors are of the opinion that an entity, which ought to have been consolidated, has been omitted, they shall incorporate their comments in this regard in the "Auditors Report".

5. Additional Disclosures

5.1 Provisions and Contingencies

To facilitate easy reading of the financial statements and to make the information on all Provisions and Contingencies available at one place, applicable NBFCs are required to disclose in the NTA the following information:

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(Amount in ₹ crore)

Break up of 'Provisions and Contingencies' Current Previous shown under the head Expenditure in Profit Year Year and Loss Account

Provisions for depreciation on Investment

Provision towards NPA

Provision made towards Income tax

Other Provision and Contingencies (with details)

Provision for Standard Assets

5.2 Draw Down from Reserves

Suitable disclosures are to be made regarding any draw down of reserves in the NTA.

5.3 Concentration of Deposits, Advances, Exposures and NPAs

5.3.1 Concentration of Deposits (for deposit taking NBFCs)

(Amount in ₹ crore)

Total Deposits of twenty largest depositors

Percentage of Deposits of twenty largest depositors to Total Deposits of the deposit taking NBFC.

5.3.2 Concentration of Advances

(Amount in ₹ crore)

Total Advances to twenty largest borrowers

Percentage of Advances to twenty largest borrowers to Total Advances of the applicable NBFC

5.3.3 Concentration of Exposures

(Amount in ₹ crore)

Total Exposure to twenty largest borrowers / customers

Percentage of Exposures to twenty largest borrowers / customers to Total Exposure of the applicable NBFC on borrowers / customers

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5.3.4 Concentration of NPAs

(Amount in ₹ crore)

Total Exposure to top four NPA

accounts

5.3.5 Sector-wise NPAs

Percentage of

Sl.SectorNPAs to Total

No.Advances in that

sector

1.Agriculture & allied activities

2.MSME

3.Corporate borrowers

4.Services

2.Unsecured personal loans

3.Auto loans

4.Other personal loans

5.4 Movement of NPAs

(Amount in ₹ crore)

Particulars Current Previous

YearYear

Net NPAs to Net Advances (%)

Movement of NPAs (Gross)

Opening balance

Additions during the year

Reductions during the year

Closing balance

Movement of Net NPAs

Opening balance

Additions during the year

Reductions during the year

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(d) Closing balance

Movement of provisions for NPAs (excluding provisions on standard assets)

Opening balance

Provisions made during the year

Write-off / write-back of excess provisions

Closing balance

5.5 Overseas Assets (for those with Joint Ventures and Subsidiaries abroad)

Name of the Joint Other Partner Country Total

Venture/ Subsidiary in the JV Assets

5.6 Off-balance Sheet SPVs sponsored

(which are required to be consolidated as per accounting norms)

Name of the SPV sponsored

Domestic Overseas

Disclosure of Complaints

1 Customer Complaints

No. of complaints pending at the

beginning of the year

No. of complaints received during

the year

No. of complaints redressed during the year

No. of complaints pending at the end of the year

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Annex XVII

Terms and Conditions Applicable to Perpetual Debt Instruments (PDI) for Being Eligible for Inclusion in Tier I capital

The Perpetual Debt Instruments (PDI) shall be issued as bonds or debentures by non-deposit taking NBFC with asset size of ₹500 crore and above on the following terms and conditions to qualify for inclusion as Tier I Capital or Tier II Capital, as the case may be, for capital adequacy purposes.

Terms of Issue of PDI

Currency of issue PDIs shall be issued in Indian Rupees only.

Amount

The aggregate amount to be raised by issue of such instruments shall be within the overall limits of Tier I and Tier II as explained in clause (iii) below. It may be raised in tranches. However, the minimum investment by single investor in each such issue/ tranche shall be ₹5 lakh.

Limits

PDI shall be eligible to be treated as Tier I capital upto 15 per cent of total Tier I capital. The above limit will be based on the amount of Tier I capital as on March 31 of previous year after deduction of goodwill and other intangible assets but before the deduction of investments. The amount of PDI in excess of amount admissible as Tier I shall qualify as Tier II capital subject to provisions contained in these Directions.

Maturity period

The PDI shall be perpetual.

Rate of interest

The interest payable to the investors may be either at a fixed rate or at a floating rate referenced to a market determined rupee interest benchmark rate.

Options

Non-deposit taking NBFC with asset size of ₹500 crore and above shall issue PDI as plain vanilla instruments only.

However, they may issue PDI with a 'call option' subject to strict compliance with each of the following conditions:

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That the instrument has run for a minimum period of ten years from the date of issue; and

Call option shall be exercised only with the prior approval of RBI. While considering the proposals received from such NBFCs for exercising the call option the RBI would, among other things, take into consideration the its CRAR position both at the time of exercise of the call option and after the exercise of the call option.

Step-up option

The issuing non-deposit taking NBFC with asset size of ₹500 crore and above, may have a step-up option for increasing the rate of interest payable on PDIs. Such option may be exercised only once during the whole life of the instrument after the lapse of ten years from the date of issue. The step-up shall not be more than 100 bps in reference to interest rate advertised in terms of offer document under clause (v) above. The limits on step-up apply to the all-in cost of the debt to the issuing NBFC.

Lock-In Clause

PDI shall be subjected to a lock-in clause in terms of which the issuing non-deposit taking NBFC with asset size of ₹500 crore and above, may defer the payment of interest, if

it's capital to risk assets ratio (CRAR) is below the minimum regulatory requirement prescribed by RBI; or

the impact of such payment results in NBFCs CRAR falling below or remaining below the minimum regulatory requirement prescribed by Reserve Bank of India;

However, non-deposit taking NBFC with asset size of ₹500 crore and above, may pay interest with the prior approval of RBI when the impact of such payment may result in net loss or increase the net loss, provided the CRAR remains above the regulatory norm.

The interest shall not be cumulative except in cases as in (a).

All instances of invocation of the lock-in clause shall be notified by the issuing NBFC to the Regional Office of Department of Supervision of the Reserve Bank of India in whose jurisdiction it is registered.

Seniority of claim

The claims of the investors in PDI shall be

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Superior to the claims of investors in equity shares; and

Subordinated to the claims of all other creditors.

Discount

The PDI instruments shall not be subjected to a progressive discount for capital adequacy purposes since these are perpetual.

Other conditions

PDI shall be fully paid-up, unsecured, and free of any restrictive clauses and the issue of PDI and the terms and conditions applicable thereto shall be compliant with the provisions of Companies Act, 1956 and all other laws for the time being in force including the rules, regulations, directions and guidelines issued by the applicable regulatory authorities.

Subject to compliance with extant FEMA Regulations, NBFCs shall obtain prior approval of the Reserve Bank of India, on a case-by-case basis, for investment by FIIs/ NRIs in PDI to be raised by a non-deposit taking NBFC with asset size of ₹500 crore and above, in Indian Rupees.

Non-deposit taking NBFC with asset size of ₹500 crore and above issuing PDI, shall comply with the terms and conditions, if any, stipulated by SEBI/ other regulatory authorities in regard to issue of the instruments.

The investment by other NBFCs in such instruments issued by a non-deposit taking NBFC with asset size of ₹500 crore and above, shall be governed by the provisions of definition of Net Owned Fund (NOF) as provided in explanation to section 45-IA of the RBI Act. As such, investment in excess of 10% of the owned fund of NBFC shall be deducted from Owned Fund to arrive at NOF of the NBFC.

Reporting Requirements

Non-deposit taking NBFC with asset size of ₹500 crore and above issuing PDI, shall submit a report to the Regional Office in whose jurisdiction it is registered giving details of the debt raised, including the terms of issue specified at item 1 above together with a copy of the offer document soon after the issue is completed.

3. Investment in PDI issued by other NBFCs-ND-SI

A non-deposit taking NBFC's with asset size of ₹500 crore and above investing in PDI issued by other NBFC and financial institutions shall be subject to

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definition of Net Owned Fund as defined in section 45-IA of the RBI Act, 1934 and will attract risk weight as prescribed by the Bank.

4. Grant of advances against PDI

Non-deposit taking NBFC with asset size of ₹500 crore and above issuing PDI, shall not grant advances against the security of the PDI issued by them.

Disclosure Requirement

Non-deposit taking NBFC with asset size of ₹500 crore and above issuing PDI, shall make suitable disclosures in their Annual Report about :

Amount of funds raised through PDI during the year and outstanding at the close of the financial year;

Percentage of the amount of PDI of the amount of its Tier I Capital;

Mention the financial year in which interest on PDI has not been paid in accordance with clause 1(viii) above.

While framing policy as regards PDI, the Board of Directors of the Non-deposit taking NBFC with asset size of ₹500 crore and above issuing PDI, shall ensure that sufficient disclosures are made to the investor which clarify the type of the instrument, the risks associated and its uninsured nature so as to enable the investor to make informed investment decision. The offer document shall contain a clause that the investor may make investment decision on the basis of its own analysis and the RBI does not accept any responsibility about repayment of such investment. The policy evolved by such NBFC shall also include provision as regards factors to be taken into account by it to demonstrate that it can meet extra load in case the company decides to step up the rate of interest under clause 1(vii) above. Board of Directors shall ensure strict compliance with all the terms and conditions set forth above.

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Annex XVIII

Guidelines for Entry of NBFCs into Insurance

NBFCs registered with the Bank shall undertake insurance agency business on fee basis and without risk participation, without the approval of the Bank, only subject to the following conditions:

The NBFCs shall obtain requisite permission from IRDA and comply with the IRDA regulations for acting as ‘composite corporate agent' with insurance companies.

The NBFCs shall not adopt any restrictive practice of forcing its customers to go in only for a particular insurance company in respect of assets financed by the NBFC. The customers shall be allowed to exercise their own choice.

As the participation by an NBFC's customer in insurance products is purely on a voluntary basis, it shall be stated in all publicity material distributed by the NBFC in a prominent way. There shall be no ‘linkage' either direct or indirect between the provision of financial services offered by the NBFC to its customers and use of the insurance products.

The premium shall be paid by the insured directly to the insurance company without routing through the NBFC.

The risks, if any, involved in insurance agency shall not get transferred to the business of the NBFC.

No NBFC shall be allowed to conduct such business departmentally. A subsidiary or company in the same group of an NBFC or of another NBFC engaged in the business of a non-banking financial institution or banking business shall not normally be allowed to join the insurance company on risk participation basis.

All NBFCs registered with RBI which satisfy the eligibility criteria given below shall be permitted to set up a joint venture company for undertaking insurance business with risk participation subject to safeguards. The maximum equity contribution such an NBFC can hold in the joint venture company shall normally be 50 per cent of the paid-up capital of the insurance company. On a selective basis, the Bank may permit

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a higher equity contribution by a promoter NBFC initially, pending divestment of equity within the prescribed period [see Note (1) below].

In case more than one company (irrespective of doing financial activity or not) in the same group of the NBFC wishes to take a stake in the insurance company, the contribution by all companies in the same group shall be counted for the limit of 50 percent prescribed for the NBFC in an insurance JV.

In cases where IRDA issues calls for capital infusion into the Insurance JV company, the Bank may, on a case to case basis, consider need based relaxation of the 50% group limit as specified. The relaxation, if permitted, shall be subject to compliance by the NBFC with all regulatory conditions as prescribed for in these Directions and such other conditions as may be necessary in the specific case. Application for such relaxation along with supporting documents shall be submitted by the NBFC to the Regional Office of the Bank under whose jurisdiction its registered office is situated.

The eligibility criteria for joint venture participant shall be as stated below:

The owned fund of the NBFC shall not be less than ₹500 crore,

The level of net non-performing assets shall be not more than 5% of the total outstanding leased/hire purchase assets and advances taken together,

The NBFC shall have net profit for the last three continuous years,

The track record of the performance of the subsidiaries, if any, of the concerned NBFC shall be satisfactory,

Regulatory compliance and servicing public deposits, if held.

The provisions of RBI Act shall be applicable for such investments while computing the net owned funds of the NBFC.

In case where a foreign partner contributes 26 per cent of the equity with the approval of insurance Regulatory and Development Authority/Foreign Investment Promotion Board, more than one NBFC may be allowed to participate in the equity of the insurance joint venture. As such participants will also assume insurance risk,

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only those NBFCs which satisfy the criteria given in paragraph 3 above, shall be eligible.

NBFCs registered with RBI which are not eligible as joint venture participant, as above can make investments up to 10 per cent of the owned fund of the NBFC or

₹50 crore, whichever is lower, in the insurance company. Such participation shall be treated as an investment and shall be without any contingent liability for the NBFC. The eligibility criteria for these NBFCs shall be as under:

The level of net NPA shall be not more than 5 per cent of total outstanding leased/hire purchase assets and advances;

The NBFC shall have net profit for the last three continuous years.

Notes:

Holding of equity by a promoter NBFC in an insurance company or participation in any form in insurance business shall be subject to compliance with any rules and regulations laid down by the IRDA/ Central Government. This will include compliance with section 6AA of the Insurance Act as amended by the IRDA Act, 1999, for divestment of equity in excess of 26 per cent of the paid-up capital within a prescribed period of time.

The eligibility criteria shall be reckoned with reference to the latest available audited balance sheet for the previous year.

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Annex XIX

Guidelines on issue of Co-Branded Credit Cards

In order to strengthen the NBFC sector by allowing diversification of their area of business, it has been decided to allow NBFCs, selectively, registered with the Reserve Bank of India to issue co-branded credit cards with scheduled commercial banks, without risk sharing, with prior approval of the Reserve Bank, for an initial period of two years and a review thereafter. NBFCs fulfilling the following minimum requirements are eligible to apply for issuance of co-branded credit- card:

Minimum net owned fund of ₹100 crore;

The company shall have made net profit as per last two years audited accounts;

The percentage of net NPAs to net advances of the NBFC as per the last audited balance sheet shall not be more than 3%;

The non-deposit-taking NBFCs (NBFCs-ND) shall maintain a Leverage Ratio of 7. While systemically important non-deposit taking NBFCs (NBFCs-ND-SIs) and deposit taking NBFCs (NBFC-D) shall have CRAR of 15%.

In addition, the NBFCs shall be required to adhere to the following stipulations:

Operational Aspects

The role of the NBFC under the tie-up arrangement shall be limited only to marketing and distribution of the co-branded credit cards. The co-branded credit card issuing bank shall be subject to all the instructions / guidelines issued by its concerned regulatory authority.

The co-branded credit card issuing bank shall be solely responsible for fulfilment of KYC requirements in respect of all co-branded cards issued under the tie-up arrangement.

The risks, if any, involved in co-branded credit cards business shall not get transferred to the business of the NBFC;

The co-branded credit card account shall be maintained by the customer with the bank and all the payments by the co-branded card holders shall be in the name of the bank; account if any maintained by the user with the NBFC shall not be debited for settlement of dues arising out of co-branded credit card;

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The NBFC entering into tie-up shall be guided by the need to ensure confidentiality of the customer's accounts. The co-branding NBFC shall not reveal any information relating to customers obtained at the time of opening the account and the co-branded credit card issuing bank shall not be permitted to access any details of customers' accounts that may violate NBFCs' secrecy obligations.

The bank issuing the card shall put in place suitable mechanism for the redressal of customer grievances. Customer complaints arising out of deficiency in the credit card service shall be the responsibility of the bank.

Legal risk, if any, arising out of court cases, damages, etc shall be borne by the issuing bank.

Other Aspects

The NBFC shall have put in place guidelines on fair practices code as required in terms of these Directions;

The NBFC shall be adhering to Know Your Customer Guidelines and provisions of Prevention of Money Laundering Act;

The NBFC shall be complying with other instructions and provisions of RBI Act, 1934 to the extent applicable to the NBFC concerned;

The NBFC shall comply with other terms and conditions as the Bank may specify in this behalf from time to time.

Further, the permission is liable to be withdrawn with a notice period of 3 months in the event of any undesirable / unhealthy operations coming to the notice of the Bank.

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Annex XX

Guidelines on Distribution of Mutual Fund Products by NBFCs

NBFCs, which desire to distribute mutual funds, shall be required to adhere to the following stipulations:

(i) Operational Aspects

(a) The NBFC shall comply with the SEBI guidelines / regulations, including its code of conduct, for distribution of mutual fund products;

(b) the NBFC shall not adopt any restrictive practice of forcing its customers to go in for a particular mutual fund product sponsored by it. Its customers shall be allowed to exercise their own choice;

(c) the participation by the NBFCs customers in mutual fund products is purely on a voluntary basis and this information shall be stated in all publicity material distributed by it in a prominent way. There shall be no 'linkage' either direct or indirect between the provisions of financial services offered by the NBFC to its customers and distribution of the mutual fund products;

(d) the NBFC shall only act as an agent of its customers, forwarding their applications for purchase/ sale of MF units together with the payment instruments, to the Mutual Fund/ the Registrars/ the transfer agents. The purchase of units shall be at the customers' risk and without the NBFC guaranteeing any assured return;

(e) the NBFC shall neither acquire units of mutual funds from the secondary market for sale to its customers, nor shall it buy back units of mutual funds from its customers;

(f) in case the NBFC is holding custody of MF units on behalf of its customers, it shall ensure that its own investments and the investments belonging to its customers are kept distinct from each other.

(ii) Other Aspects

The NBFC shall have put in place a comprehensive Board approved policy regarding undertaking mutual funds distribution. The services relating to the same shall be offered to its customers in accordance with this policy. The policy will also encompass issues of customer appropriateness and suitability as well as grievance redressal mechanism. The code of conduct prescribed by SEBI, as amended from time to time and as applicable, shall be complied with by NBFCs undertaking these activities;

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the NBFC shall be adhering to Know Your Customer (KYC) Guidelines and provisions of Prevention of Money Laundering Act.

2. NBFCs shall comply with other terms and conditions as the Bank may specify in this regard from time to time.

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Annex XXI

Guidelines for Credit Default Swaps - NBFCs as users

Definitions The following definitions are used in these guidelines:

Credit event payment – the amount which is payable by the credit protection seller to the credit protection buyer under the terms of the credit derivative contract following the occurrence of a credit event. The payment shall be only in the form of physical settlement (payment of par in exchange for physical delivery of a deliverable obligation).

Underlying asset / obligation – The asset23 which a protection buyer is seeking to hedge. (iii) Deliverable asset / obligation – any obligation24 of the reference entity which shall be delivered, under the terms of the contract, if a credit event occurs. (Assets under (iii) above, will rank at least pari-passu or junior to the underlying obligation).

Reference obligation - the obligation25 used to calculate the amount payable when a credit event occurs under the terms of a credit derivative contract. [A reference obligation is relevant for obligations that are to be cash settled (on a par-less-recovery basis).]

2. Operational requirements for CDS

A CDS contract shall represent a direct claim on the protection seller and shall be explicitly referenced to specific exposure, so that the extent of the cover is clearly defined and incontrovertible.

Other than non-payment by a protection buyer of premium in respect of the credit protection contract, it shall be irrevocable.

There shall be no clause in the contract that shall allow the protection seller unilaterally to cancel the credit cover or that would increase the effective cost of cover as a result of deteriorating credit quality in the hedged exposure.

The CDS contract shall be unconditional; there shall be no clause in the protection contract outside the direct control of the NBFC that could prevent the protection seller from being obliged to pay out in a timely manner in the event that the original counterparty fails to make the payment(s) due.

Please refer to paragraph 2.4 of the circular IDMD.PCD.No.5053/14.03.04/2010-11 dated May 23, 2011.

For the present, only deliverable obligation permitted in terms of guidelines on CDS vide circular IDMD.PCD.No.5053 /14.03.04/2010-11 dated May 23, 2011.

Please refer to paragraph 2.4 of the circular IDMD.PCD.No.5053/14.03.04/2010-11 dated May 23, 2011.

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The credit events specified by the contracting parties shall at a minimum cover:

failure to pay the amounts due under terms of the underlying obligation that are in effect at the time of such failure (with a grace period that is closely in line with the grace period in the underlying obligation);

bankruptcy, insolvency or inability of the obligor to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and analogous events; and

restructuring of the underlying obligation (as contemplated in the

guidelines on CDS issued vide Circular No.IDMD.PCD.No.5053/14.03.04/2010-11 dated May 23, 2011) involving forgiveness or postponement of principal, interest or fees that results in a credit loss event;

when the restructuring of the underlying obligation is not covered by the CDS, but the other requirements in paragraph 2 are met, partial recognition of the CDS shall be allowed. If the amount of the CDS is less than or equal to the amount of the underlying obligation, 60% of the amount of the hedge can be recognised as covered. If the amount of the CDS is larger than that of the underlying obligation, then the amount of eligible hedge is capped at 60% of the amount of the underlying obligation.

If the CDS specifies deliverable obligations that are different from the underlying obligation, the resultant asset mismatch shall be governed under paragraph (j).

The CDS shall not terminate prior to expiration of any grace period required for a default on the underlying obligation to occur as a result of a failure to pay26 .

If the protection buyer’s right/ability to transfer the underlying obligation to the protection seller is required for settlement, the terms of the underlying obligation shall provide that any required consent to such transfer may not be unreasonably withheld.

The identity of the parties responsible for determining whether a credit event has

occurred shall be clearly defined. This determination shall not be the sole

26 Definition of maturity – the maturity of the underlying exposure and the maturity of the hedge shall both be defined conservatively. The effective maturity of the underlying shall be gauged as the longest possible remaining time before the counterparty is scheduled to fulfill its obligation, taking into account any applicable grace period.

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responsibility of the protection seller. The protection buyer shall have the right/ability to inform the protection seller of the occurrence of a credit event.

A mismatch between the underlying obligation and the reference obligation or deliverable obligation is permissible if (1) the reference obligation or deliverable obligation ranks pari passu with or is junior to the underlying obligation, and (2) the underlying obligation and reference obligation or deliverable obligation share the same obligor (i.e. the same legal entity) and legally enforceable cross-default or cross-acceleration clauses are in place.

A mismatch between the underlying obligation and the obligation used for purposes of determining whether a credit event has occurred is permissible if (1) the latter obligation ranks pari passu with or is junior to the underlying obligation, and (2) the underlying obligation and reference obligation share the same obligor (i.e. the same legal entity) and legally enforceable cross-default or cross acceleration clauses are in place.

Treatment of exposures below materiality thresholds Materiality thresholds on payments below which no payment is made in the event of loss as per the CDS contract, are equivalent to retained first loss positions and shall be assigned risk weight of 667% (1/0.15*100 as minimum CRAR requirement for NBFCs is 15%) for capital adequacy purpose by the protection buyer.

Prudential treatment post-credit event - In case the credit event payment is not received within the period as stipulated in the CDS contract, the NBFC shall ignore the credit protection of the CDS and reckon the credit exposure on the underlying asset and maintain appropriate level of capital and provisions as warranted for the exposure. On receipt of the credit event payment, (a) the underlying asset shall be removed from the books if it has been delivered to the protection seller; or (b) the book value of the underlying asset shall be reduced to the extent of credit event payment received if the credit event payment does not fully cover the book value of the underlying asset and appropriate provisions shall be maintained for the reduced value.

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Capital Adequacy In terms of Non-Banking Financial Company –Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 risk weights for credit risk for corporate bonds held by NBFCs is 100%. A CDS contract creates a counterparty exposure on the protection seller on account of the credit event payment. In case of hedging of the cash position by CDS, the exposure shall be reckoned on the protection seller subject to the conditions mentioned in para 6 below. NBFCs shall calculate the counterparty credit risk charge for all bought CDS positions as the sum of the current mark-to-market value, (if positive and zero, if MTM is negative) and the potential future exposure.

Treatment of exposure to the protection seller

6.1 Exposure to the underlying asset in respect of the hedged exposure shall be deemed to have been substituted by exposure to the protection seller, if the following conditions are satisfied:

a. Operational requirements mentioned in para 2 are satisfied

b. There is no maturity mismatch between the underlying asset and the deliverable obligation. If this condition is not satisfied, then the amount of credit protection to be recognised shall be computed as indicated in paragraph 6.2 below. In all other cases the exposure shall be deemed to be on the underlying asset.

6.2 Risk weights as applicable to the underlying assets shall be applied for the unprotected portion of the exposure. The amount of credit protection shall be adjusted if there are any mismatches between the underlying asset/ obligation and the deliverable asset / obligation with regard to asset or maturity. These are dealt with in detail in the following paragraphs.

6.3 Mismatches The amount of credit protection shall be adjusted if there are any mismatches between the underlying asset/ obligation and the deliverable asset / obligation with regard to asset or maturity.

Asset mismatches: Asset mismatch will arise if the underlying asset is different from the deliverable obligation. Protection shall be reckoned as available to the NBFC only if the mismatched assets meet the requirements specified in paragraph 2 (j) above.

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Maturity mismatches: The NBFC shall be eligible to reckon the amount of protection if the maturity of the credit derivative contract were to be equal to the maturity of the underlying asset. If, however, the maturity of the CDS contract is less than the maturity of the underlying asset, then it shall be construed as a maturity mismatch. In case of maturity mismatch the amount of protection shall be determined in the following manner:

If the residual maturity of the credit derivative product is less than three months no protection shall be recognized.

If the residual maturity of the credit derivative contract is three months or more protection proportional to the period for which it is available shall be recognised.

When there is a maturity mismatch the following adjustment shall be applied. Pa = P x (t- .25) ÷ (T- .25) Where: Pa = value of the credit protection adjusted for maturity mismatch P = credit protection t = min (T, residual maturity of the credit protection arrangement) expressed in years T = min (5, residual maturity of the underlying exposure) expressed in years Example: Suppose the underlying asset is a corporate bond of Face Value of ₹100 where the residual maturity is of 5 years and the residual maturity of the CDS is 4 years. The amount of credit protection is computed as under: 100 * {(4-.25) ÷ (5-.25)}

100*(3.75÷ 4.75) = 78.95 c. Once the residual maturity of the CDS contract reaches three months, protection ceases to be recognised.

6.4 NBFCs as users shall adhere to all the criteria required for transferring the exposures fully to the protection seller in terms of paragraph 6.1 above on an on-going basis so as to qualify for exposure relief on the underlying asset. In case any of these criteria are not met subsequently, the NBFC shall have to reckon the exposure on the underlying asset. Therefore, NBFCs shall restrict the total exposure to an obligor including that covered by way of CDS within an internal exposure ceiling considered appropriate by the Board of the NBFC in such a way that it shall not breach the single / group borrower exposure limit prescribed by RBI. In case of the event of any breach in the single / group borrower exposure limit, the entire exposure in excess of the limit will be risk weighted at 667%. In order to ensure that consequent upon such a treatment, the NBFC shall not breach the minimum capital

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requirement prescribed by RBI, it shall keep sufficient cushion in capital in case it assumes exposures in excess of normal exposure limit.

6.5 No netting of positive and negative marked-to-market values of the contracts with the same counterparty shall be allowed for the purpose of complying with the exposure norms.

7. General Provisions Requirements

For the CDS positions of NBFCs, they shall hold general provisions for gross positive marked-to-market values of the CDS contracts.

8. Reporting Requirement:

On a quarterly basis, NBFCs shall report “total exposure” in all cases where they have assumed exposures against borrowers in excess of the normal single / group exposure limits due to the credit protections obtained by them through CDS, guarantees or any other permitted instruments of credit risk transfer, to the Regional Office of Department of Supervision where they are registered.

NBFCs shall also disclose in their notes to accounts of balance sheet the details given in annex below:

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Annex

Format of Disclosure to be made in the Annual Financial Statements

(₹ crore)

No. of transactions during the year

Amount of protection bought during the year

No. of transactions where credit event payment was received during the year

pertaining to current year's transactions

pertaining to previous year(s)' transactions

Outstanding transactions as on March 31

No. of Transactions

Amount of protection

Net income / profit (expenditure / loss) in respect of CDS transactions during year-to-date

premium paid

Credit event payments received (net of value of deliverable obligation).

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Annex XXIII

Guidelines on Private Placement of NCDs (maturity more than 1 year) by NBFCs

NBFCs shall put in place a Board approved policy for resource planning which, inter-alia, shall cover the planning horizon and the periodicity of private placement.

The issues shall be governed by the following instructions:

The minimum subscription per investor shall be ₹20,000 (Rupees Twenty thousand);

The issuance of private placement of NCDs shall be in two separate categories, those with a maximum subscription of less than ₹1 crore and those with a minimum subscription of ₹1 crore and above per investor;

There shall be a limit of 200 subscribers for every financial year, for issuance of NCDs with a maximum subscription of less than ₹1 crore, and such subscription shall be fully secured;

There shall be no limit on the number of subscribers in respect of issuances with a minimum subscription of ₹1crore and above; the option to create security in favour of subscribers shall be with the issuers. Such unsecured debentures shall not be treated as public deposits as defined in these Directions.

An NBFC shall issue debentures only for deployment of funds on its own balance sheet and not to facilitate resource requests of group entities / parent company / associates.

An NBFC shall not extend loans against the security of its own debentures (issued either by way of private placement or public issue).

Tax exempt bonds offered by NBFCs are exempted from the applicability of the circular.

For NCDs of maturity upto one year, guidelines on Issuance of Non-Convertible Debentures (Reserve Bank) Directions, 2010, dated June 23, 2010, by Internal Debt Management Department, RBI shall be applicable.

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Annex XXV

Directions on Managing Risks and Code of Conduct in Outsourcing of

Financial Services by NBFCs

Introduction

1.1 'Outsourcing' is defined as the NBFC’s use of a third party (either an affiliated entity within a corporate group or an entity that is external to the corporate group) to perform activities on a continuing basis that would normally be undertaken by the NBFC itself, now or in the future.

‘Continuing basis' includes agreements for a limited period.

1.2 NBFCs have been outsourcing various activities and are hence exposed to various risks as detailed in para 5.3. Further, the outsourced activities are to be brought within regulatory purview to a) protect the interest of the customers of NBFCs and b) to ensure that the NBFC concerned and the Reserve Bank of India have access to all relevant books, records and information available with service provider. Typically outsourced financial services include applications processing (loan origination, credit card), document processing, marketing and research, supervision of loans, data processing and back office related activities, besides others.

1.3 Some key risks in outsourcing are Strategic Risk, Reputation Risk, Compliance Risk, Operational Risk, Legal Risk, Exit Strategy Risk, Counterparty Risk, Country Risk, Contractual Risk, Access Risk, Concentration and Systemic Risk. The failure of a service provider in providing a specified service, a breach in security/ confidentiality, or non-compliance with legal and regulatory requirements by the service provider can lead to financial losses or loss of reputation for the NBFC and could also lead to systemic risks.

1.4 It is therefore imperative for the NBFC outsourcing its activities to ensure sound and responsive risk management practices for effective oversight, due diligence and management of risks arising from such outsourced activities. The directions are applicable to material outsourcing arrangements as explained in para 3 which may be entered into by an NBFC with a service provider located in India or elsewhere. The service provider may either be a member of the group/ conglomerate to which the NBFC belongs, or an unrelated party.

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1.5 The underlying principles behind these directions are that the regulated entity shall ensure that outsourcing arrangements neither diminish its ability to fulfil its obligations to customers and RBI nor impede effective supervision by RBI. NBFCs, therefore, have to take steps to ensure that the service provider employs the same high standard of care in performing the services as is expected to be employed by the NBFCs, if the activities were conducted within the NBFCs and not outsourced. Accordingly, NBFCs shall not engage in outsourcing that would result in their internal control, business conduct or reputation being compromised or weakened.

1.6 (i) These directions are concerned with managing risks in outsourcing of financial services and are not applicable to technology-related issues and activities not related to financial services, such as usage of courier, catering of staff, housekeeping and janitorial services, security of the premises, movement and archiving of records, etc. NBFCs which desire to outsource financial services would not require prior approval from RBI. However, such arrangements would be subject to on-site/ off- site monitoring and inspection/ scrutiny by RBI.

In regard to outsourced services relating to credit cards, RBI's detailed instructions contained in its circular on credit card activities vide DBOD.FSD.BC.49/24.01.011/2005-06 dated November 21, 2005 would be applicable.

Activities that shall not be outsourced

NBFCs which choose to outsource financial services shall, however, not outsource core management functions including Internal Audit, Strategic and Compliance functions and decision-making functions such as determining compliance with KYC norms for opening deposit accounts, according sanction for loans (including retail loans) and management of investment portfolio. However, for NBFCs in a group/conglomerate, these functions may be outsourced within the group subject to compliance with instructions in Para 6. Further, while internal audit function itself is a management process, the internal auditors can be on contract.

Material Outsourcing

For the purpose of these directions, material outsourcing arrangements are those which, if disrupted, have the potential to significantly impact the business operations,

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reputation, profitability or customer service. Materiality of outsourcing would be based on:

the level of importance to the NBFC of the activity being outsourced as well as the significance of the risk posed by the same;

the potential impact of the outsourcing on the NBFC on various parameters such as earnings, solvency, liquidity, funding capital and risk profile;

• the likely impact on the NBFC’s reputation and brand value, and ability to achieve its business objectives, strategy and plans, should the service provider fail to perform the service;

the cost of the outsourcing as a proportion of total operating costs of the NBFC;

the aggregate exposure to that particular service provider, in cases where the NBFC outsources various functions to the same service provider and

the significance of activities outsourced in context of customer service and protection.

NBFC's role and Regulatory and Supervisory Requirements

4.1 The outsourcing of any activity by NBFC does not diminish its obligations, and those of its Board and senior management, who have the ultimate responsibility for the outsourced activity. NBFCs would therefore be responsible for the actions of their service provider including Direct Sales Agents/ Direct Marketing Agents and recovery agents and the confidentiality of information pertaining to the customers that is available with the service provider. NBFCs shall retain ultimate control of the outsourced activity.

4.2 It is imperative for the NBFC, when performing its due diligence in relation to outsourcing, to consider all relevant laws, regulations, guidelines and conditions of approval, licensing or registration.

4.3 Outsourcing arrangements shall not affect the rights of a customer against the NBFC, including the ability of the customer to obtain redress as applicable under relevant laws. In cases where the customers are required to deal with the service providers in the process of dealing with the NBFC, NBFCs shall incorporate a clause in the relative product literature/ brochures, etc., stating that they may use the services of agents in sales/ marketing etc. of the products. The role of agents may be indicated in broad terms.

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4.4 The service provider shall not impede or interfere with the ability of the NBFC to effectively oversee and manage its activities nor shall it impede the Reserve Bank of India in carrying out its supervisory functions and objectives.

4.5 NBFCs need to have a robust grievance redress mechanism, which in no way shall be compromised on account of outsourcing.

4.6 The service provider, if not a group company of the NBFC, shall not be owned or controlled by any director of the NBFC or their relatives; these terms have the same meaning as assigned under Companies Act, 2013.

Risk Management practices for Outsourced Financial Services

1 Outsourcing Policy

An NBFC intending to outsource any of its financial activities shall put in place a comprehensive outsourcing policy, approved by its Board, which incorporates, inter alia, criteria for selection of such activities as well as service providers, delegation of authority depending on risks and materiality and systems to monitor and review the operations of these activities.

5.2 Role of the Board and Senior Management

5.2.1 Role of the Board

The Board of the NBFC, or a Committee of the Board to which powers have been delegated shall be responsible inter alia for the following:

approving a framework to evaluate the risks and materiality of all existing and prospective outsourcing and the policies that apply to such arrangements;

laying down appropriate approval authorities for outsourcing depending on risks and materiality;

setting up suitable administrative framework of senior management for the purpose of these directions;

undertaking regular review of outsourcing strategies and arrangements for their continued relevance, and safety and soundness and

deciding on business activities of a material nature to be outsourced and approving such arrangements.

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5.2.2 Responsibilities of the Senior Management

Evaluating the risks and materiality of all existing and prospective outsourcing, based on the framework approved by the Board;

developing and implementing sound and prudent outsourcing policies and procedures commensurate with the nature, scope and complexity of the outsourcing activity;

reviewing periodically the effectiveness of policies and procedures;

communicating information pertaining to material outsourcing risks to the Board in a timely manner;

ensuring that contingency plans, based on realistic and probable disruptive scenarios, are in place and tested;

ensuring that there is independent review and audit for compliance with set policies and

undertaking periodic review of outsourcing arrangements to identify new material outsourcing risks as they arise.

5.3 Evaluation of the Risks

The NBFCs shall evaluate and guard against the following risks in outsourcing:

Strategic Risk – Where the service provider conducts business on its own behalf, inconsistent with the overall strategic goals of the NBFC.

Reputation Risk – Where the service provided is poor and customer interaction is not consistent with the overall standards expected of the NBFC.

Compliance Risk – Where privacy, consumer and prudential laws are not adequately complied with by the service provider.

Operational Risk- Arising out of technology failure, fraud, error, inadequate financial capacity to fulfil obligations and/ or to provide remedies.

Legal Risk – Where the NBFC is subjected to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements due to omissions and commissions of the service provider.

Exit Strategy Risk – Where the NBFC is over-reliant on one firm, the loss of relevant skills in the NBFC itself preventing it from bringing the activity back in-house and where NBFC has entered into contracts that make speedy exits prohibitively expensive.

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Counter party Risk – Where there is inappropriate underwriting or credit assessments.

Contractual Risk – Where the NBFC may not have the ability to enforce the contract.

Concentration and Systemic Risk – Where the overall industry has considerable exposure to one service provider and hence the NBFC may lack control over the service provider.

Country Risk – Due to the political, social or legal climate creating added risk.

5.4 Evaluating the Capability of the Service Provider

5.4.1 In considering or renewing an outsourcing arrangement, appropriate due diligence shall be performed to assess the capability of the service provider to comply with obligations in the outsourcing agreement. Due diligence shall take into consideration qualitative and quantitative, financial, operational and reputational factors. NBFCs shall consider whether the service providers' systems are compatible with their own and also whether their standards of performance including in the area of customer service are acceptable to it. NBFCs shall also consider, while evaluating the capability of the service provider, issues relating to undue concentration of outsourcing arrangements with a single service provider. Where possible, the NBFC shall obtain independent reviews and market feedback on the service provider to supplement its own findings.

5.4.2 Due diligence shall involve an evaluation of all available information about the service provider, including but not limited to the following:

past experience and competence to implement and support the proposed activity over the contracted period;

financial soundness and ability to service commitments even under adverse conditions;

business reputation and culture, compliance, complaints and outstanding or potential litigation;

security and internal control, audit coverage, reporting and monitoring environment, business continuity management and

ensuring due diligence by service provider of its employees.

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5.5 The Outsourcing Agreement

The terms and conditions governing the contract between the NBFC and the service provider shall be carefully defined in written agreements and vetted by NBFC's legal counsel on their legal effect and enforceability. Every such agreement shall address the risks and risk mitigation strategies. The agreement shall be sufficiently flexible to allow the NBFC to retain an appropriate level of control over the outsourcing and the right to intervene with appropriate measures to meet legal and regulatory obligations. The agreement shall also bring out the nature of legal relationship between the parties - i.e. whether agent, principal or otherwise. Some of the key provisions of the contract shall be the following:

the contract shall clearly define what activities are going to be outsourced including appropriate service and performance standards;

the NBFC must ensure it has the ability to access all books, records and information relevant to the outsourced activity available with the service provider;

the contract shall provide for continuous monitoring and assessment by the NBFC of the service provider so that any necessary corrective measure can be taken immediately;

a termination clause and minimum period to execute a termination provision, if deemed necessary, shall be included;

controls to ensure customer data confidentiality and service providers' liability in case of breach of security and leakage of confidential customer related information shall be incorporated;

there must be contingency plans to ensure business continuity;

the contract shall provide for the prior approval/ consent by the NBFC of the use of subcontractors by the service provider for all or part of an outsourced activity;

it shall provide the NBFC with the right to conduct audits on the service provider whether by its internal or external auditors, or by agents appointed to act on its behalf and to obtain copies of any audit or review reports and findings made on the service provider in conjunction with the services performed for the NBFC;

outsourcing agreements shall include clauses to allow the Reserve Bank of India or persons authorised by it to access the NBFC's documents, records of transactions, and other necessary information given to, stored or processed by the service provider within a reasonable time;

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x. outsourcing agreement shall also include a clause to recognise the right of the Reserve Bank to cause an inspection to be made of a service provider of an NBFC and its books and account by one or more of its officers or employees or other persons;

the outsourcing agreement shall also provide that confidentiality of customer's information shall be maintained even after the contract expires or gets terminated and

the NBFC shall have necessary provisions to ensure that the service provider preserves documents as required by law and take suitable steps to ensure that its interests are protected in this regard even post termination of the services.

5.6 Confidentiality and Security

5.6.1 Public confidence and customer trust in the NBFC is a prerequisite for the stability and reputation of the NBFC. Hence the NBFC shall seek to ensure the preservation and protection of the security and confidentiality of customer information in the custody or possession of the service provider.

5.6.2 Access to customer information by staff of the service provider shall be on 'need to know' basis i.e., limited to those areas where the information is required in order to perform the outsourced function.

5.6.3 The NBFC shall ensure that the service provider is able to isolate and clearly identify the NBFC's customer information, documents, records and assets to protect the confidentiality of the information. In instances, where service provider acts as an outsourcing agent for multiple NBFCs, care shall be taken to build strong safeguards so that there is no comingling of information / documents, records and assets.

5.6.4 The NBFC shall review and monitor the security practices and control processes of the service provider on a regular basis and require the service provider to disclose security breaches.

5.6.5 The NBFC shall immediately notify RBI in the event of any breach of security and leakage of confidential customer related information. In these eventualities, the NBFC would be liable to its customers for any damages.

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5.7 Responsibilities of Direct Sales Agents (DSA)/ Direct Marketing Agents (DMA)/ Recovery Agents

5.7.1 NBFCs shall ensure that the DSA/ DMA/ Recovery Agents are properly trained to handle their responsibilities with care and sensitivity, particularly aspects such as soliciting customers, hours of calling, privacy of customer information and conveying the correct terms and conditions of the products on offer, etc.

5.7.2 NBFCs shall put in place a board approved Code of conduct for DSA/ DMA/ Recovery Agents, and obtain their undertaking to abide by the code. In addition, Recovery Agents shall adhere to extant instructions on Fair Practices Code for NBFCs as also their own code for collection of dues and repossession of security. It is essential that the Recovery Agents refrain from action that could damage the integrity and reputation of the NBFC and that they observe strict customer confidentiality.

5.7.3 The NBFC and their agents shall not resort to intimidation or harassment of any kind, either verbal or physical, against any person in their debt collection efforts, including acts intended to humiliate publicly or intrude the privacy of the debtors' family members, referees and friends, making threatening and anonymous calls or making false and misleading representations.

5.8 Business Continuity and Management of Disaster Recovery Plan

5.8.1 An NBFC shall require its service providers to develop and establish a robust framework for documenting, maintaining and testing business continuity and recovery procedures. NBFCs need to ensure that the service provider periodically tests the Business Continuity and Recovery Plan and may also consider occasional joint testing and recovery exercises with its service provider.

5.8.2 In order to mitigate the risk of unexpected termination of the outsourcing agreement or liquidation of the service provider, NBFCs shall retain an appropriate level of control over their outsourcing and the right to intervene with appropriate measures to continue its business operations in such cases without incurring prohibitive expenses and without any break in the operations of the NBFC and its services to the customers.

5.8.3 In establishing a viable contingency plan, NBFCs shall consider the availability of alternative service providers or the possibility of bringing the

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outsourced activity back in-house in an emergency and the costs, time and resources that would be involved.

5.8.4 Outsourcing often leads to the sharing of facilities operated by the service provider. The NBFC shall ensure that service providers are able to isolate the NBFC's information, documents and records, and other assets. This is to ensure that in appropriate situations, all documents, records of transactions and information given to the service provider, and assets of the NBFC, can be removed from the possession of the service provider in order to continue its business operations, or deleted, destroyed or rendered unusable.

5.9 Monitoring and Control of Outsourced Activities

5.9.1 The NBFC shall have in place a management structure to monitor and control its outsourcing activities. It shall ensure that outsourcing agreements with the service provider contain provisions to address their monitoring and control of outsourced activities.

5.9.2 A central record of all material outsourcing that is readily accessible for review by the Board and senior management of the NBFC shall be maintained. The records shall be updated promptly and half yearly reviews shall be placed before the Board or Risk Management Committee.

5.9.3 Regular audits by either the internal auditors or external auditors of the NBFC shall assess the adequacy of the risk management practices adopted in overseeing and managing the outsourcing arrangement, the NBFC's compliance with its risk management framework and the requirements of these directions.

5.9.4 NBFCs shall at least on an annual basis, review the financial and operational condition of the service provider to assess its ability to continue to meet its outsourcing obligations. Such due diligence reviews, which can be based on all available information about the service provider shall highlight any deterioration or breach in performance standards, confidentiality and security, and in business continuity preparedness.

5.9.5 In the event of termination of the outsourcing agreement for any reason in cases where the service provider deals with the customers, the same shall be publicized by displaying at a prominent place in the branch, posting it on the web-site, and informing the customers so as to ensure that the customers do not continue to deal with the service provider.

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5.9.6 Certain cases, like outsourcing of cash management, might involve reconciliation of transactions between the NBFC, the service provider and its sub-contractors. In such cases, NBFCs shall ensure that reconciliation of transactions between the NBFC and the service provider (and/ or its sub-contractor), are carried out in a timely manner. An ageing analysis of entries pending reconciliation with outsourced vendors shall be placed before the Audit Committee of the Board (ACB) and NBFCs shall make efforts to reduce the old outstanding items therein at the earliest.

5.9.7 A robust system of internal audit of all outsourced activities shall also be put in place and monitored by the ACB of the NBFC.

5.10 Redress of Grievances related to Outsourced Services

NBFCs shall constitute Grievance Redressal Machinery as contained in RBI’s circular on Grievance Redressal Mechanism vide DNBS.CC.PD.No.320/03.10. 01/2012-13 dated February 18, 2013. At the operational level, all NBFCs shall display the name and contact details (Telephone/ Mobile nos. as also email address) of the Grievance Redressal Officer prominently at their branches/ places where business is transacted. The designated officer shall ensure that genuine grievances of customers are redressed promptly without involving delay. It shall be clearly indicated that NBFCs' Grievance Redressal Machinery will also deal with the issue relating to services provided by the outsourced agency.

Generally, a time limit of 30 days may be given to the customers for preferring their complaints/ grievances. The grievance redressal procedure of the NBFC and the time frame fixed for responding to the complaints shall be placed on the NBFC's website.

5.11 Reporting of transactions to FIU or other competent authorities

NBFCs would be responsible for making Currency Transactions Reports and Suspicious Transactions Reports to FIU or any other competent authority in respect of the NBFCs' customer related activities carried out by the service providers.

Outsourcing within a Group/ Conglomerate

6.1 In a group structure, NBFCs may have back-office and service arrangements/ agreements with group entities e.g. sharing of premises, legal and other professional services, hardware and software applications, centralize back-office functions,

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outsourcing certain financial services to other group entities, etc. Before entering into such arrangements with group entities, NBFCs shall have a Board approved policy and also service level agreements/arrangements with their group entities, which shall also cover demarcation of sharing resources i.e. premises, personnel, etc. Moreover the customers shall be informed specifically about the company which is actually offering the product/service, wherever there are multiple group entities involved or any cross selling observed.

6.2 While entering into such arrangements, NBFCs shall ensure that these:

a. are appropriately documented in written agreements with details like scope of services, charges for the services and maintaining confidentiality of the customer's data;

b. do not lead to any confusion to the customers on whose products/services they are availing by clear physical demarcation of the space where the activities of the NBFC and those of its other group entities are undertaken;

c. do not compromise the ability to identify and manage risk of the NBFC on a stand-alone basis;

d. do not prevent the RBI from being able to obtain information required for the supervision of the NBFC or pertaining to the group as a whole; and

e. incorporate a clause under the written agreements that there is a clear obligation for any service provider to comply with directions given by the RBI in relation to the activities of the NBFC.

6.3 NBFCs shall ensure that their ability to carry out their operations in a sound fashion would not be affected if premises or other services (such as IT systems, support staff) provided by the group entities become unavailable.

6.4 If the premises of the NBFC are shared with the group entities for the purpose of cross-selling, NBFCs shall take measures to ensure that the entity's identification is distinctly visible and clear to the customers. The marketing brochure used by the group entity and verbal communication by its staff/ agent in the NBFCs premises shall mention nature of arrangement of the entity with the NBFC so that the customers are clear on the seller of the product.

6.5 NBFCs shall not publish any advertisement or enter into any agreement stating or suggesting or giving tacit impression that they are in any way responsible for the obligations of its group entities.

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6.6 The risk management practices expected to be adopted by an NBFC while outsourcing to a related party (i.e. party within the Group / Conglomerate) would be identical to those specified in Para 5 of this directions.

Offshore outsourcing of Financial Services

7.1 The engagement of service providers in a foreign country exposes an NBFC to country risk - economic, social and political conditions and events in a foreign country that may adversely affect the NBFC. Such conditions and events could prevent the service provider from carrying out the terms of its agreement with the NBFC. To manage the country risk involved in such outsourcing activities, the NBFC shall take into account and closely monitor government policies and political, social, economic and legal conditions in countries where the service provider is based, both during the risk assessment process and on a continuous basis and establish sound procedures for dealing with country risk problems. This includes having appropriate contingency and exit strategies. In principle, arrangements shall only be entered into with parties operating in jurisdictions generally upholding confidentiality clauses and agreements. The governing law of the arrangement shall also be clearly specified.

7.2 The activities outsourced outside India shall be conducted in a manner so as not to hinder efforts to supervise or reconstruct the India activities of the NBFC in a timely manner.

7.3 As regards the offshore outsourcing of financial services relating to Indian Operations, NBFCs shall additionally ensure that

Where the off-shore service provider is a regulated entity, the relevant off-shore regulator will neither obstruct the arrangement nor object to RBI inspection visits/ visits of NBFCs internal and external auditors.

The availability of records to management and the RBI will withstand the liquidation of either the offshore custodian or the NBFC in India.

The regulatory authority of the offshore location does not have access to the data relating to Indian operations of the NBFC simply on the ground that the processing is being undertaken there (not applicable if offshore processing is done in the home country of the NBFC).

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The jurisdiction of the courts in the offshore location where data is maintained does not extend to the operations of the NBFC in India on the strength of the fact that the data is being processed there even though the actual transactions are undertaken in India and

All original records continue to be maintained in India.

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Annex XXVI

Regulatory Guidance on Implementation of Indian Accounting Standards by

NBFCs27

The responsibility of preparing and ensuring fair presentation of the financial statements of the NBFC vests primarily with its Board of Directors. The Reserve Bank, expects a high quality implementation of Ind AS which will require detailed analysis, application of judgment and detailed documentation to support judgments. These guidelines focus on the need to ensure consistency in the application of the accounting standards in specific areas, including asset classification and provisioning, and provide clarifications on regulatory capital in the light of Ind AS implementation. It may be noted that these instructions and guidelines relate to specific prudential aspects of Ind AS implementation by NBFCs and are not meant to provide a comprehensive commentary on the accounting standards or comprehensive technical interpretation of the standards, nor intended to cover all possible situations. Accordingly, with respect to matters not dealt with in this Annex, NBFCs are required to refer to the notified accounting standards, application guidance, educational material and other clarifications issued by the Institute of Chartered Accountants of India (ICAI).

Governance Framework

In view of the criticality of the nature of the business model in determining the classification of financial assets and restrictions on subsequent reclassification, NBFCs are advised to put in place Board approved policies that clearly articulate and document their business models and portfolios. NBFCs shall also articulate the objectives for managing each portfolio.

NBFCs shall frame their policy for sales out of amortised cost business model portfolios and disclose the same in their notes to financial statements.

The Reserve Bank expects the Board of Directors to approve sound

methodologies28 for computation of Expected Credit Losses(ECL) that address policies, procedures and controls for assessing and measuring credit risk on all

27 NBFCs that are required to implement Ind AS in terms of Companies (Indian Accounting Standards) Rules, 2015 as amended from time to time

NBFCs may draw reference to Guidance on Credit Risk and Accounting for Expected Credit Losses issued by Basel Committee on Banking Supervision (BCBS) in December 2015, which is structured around 11 principles out of which first eight principles deal with supervisory guidance and inter-alia cover Board/Senior Management’s responsibilities, adoption of sound methodologies for credit risk measurement, disclosure requirements etc.

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lending exposures, commensurate with the size, complexity and risk profile specific to the NBFC. The parameters and assumptions considered as well as their sensitivity to the ECL output should be documented. NBFCs are advised to not make changes in the parameters, assumptions and other aspects of their ECL model for the purposes of profit smoothening. The rationale and justification for any change in the ECL model should be documented and approved by the Board. Similarly, any adjustments to the model output (i.e. a management overlay) should be approved by the Audit Committee of the Board (ACB) and its rationale and basis should be clearly documented.

Ind AS 109 does not explicitly define default29, but requires entities to define default in a manner consistent with that used for internal credit risk management. It is recommended that the definition of default adopted for accounting purposes is guided by the definition used for regulatory purposes. The ACB should approve the classification of accounts that are past due beyond 90 days but not treated as impaired, with the rationale for the same clearly documented. Further, the number of such accounts and the total amount outstanding and the overdue amounts should be disclosed in the notes to the financial statements.

Regardless of the way in which the NBFC assesses significant increase in credit risk, there is a rebuttable presumption under Ind AS 109 that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due. Ind AS 109 also permits that an NBFC can rebut this presumption if it has reasonable and supportable information that demonstrates that the credit risk has not increased significantly since initial recognition even though the contractual payments are more than 30 days past due. NBFCs should educate their customers on the need to make payments in a timely manner. However, in limited circumstances, where NBFCs do rebut the presumption, it should be done only with clear documentation of the justification for doing so. All such cases shall be placed

Para B5.5.37 of Ind AS 109 states that “…an entity shall apply a default definition that is consistent with the definition used for internal credit risk management purposes for the relevant financial instrument and consider qualitative indicators (for example, financial covenants) when appropriate. However, there is a rebuttable presumption that default does not occur later than when a financial asset is 90 days past due unless an entity has reasonable and supportable information to demonstrate that a more lagging default criterion is more appropriate. The definition of default used for these purposes shall be applied consistently to all financial instruments unless information becomes available that demonstrates that another default definition is more appropriate for a particular financial instrument.”

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before the ACB. NBFCs shall not defer the recognition of significant increase in credit risk for any exposure that is overdue beyond 60 days.

2. Prudential Floor for ECL

NBFCs shall hold impairment allowances as required by Ind AS. In parallel, NBFCs shall also maintain the asset classification and compute provisions as per extant prudential norms on Income Recognition, Asset Classification and Provisioning (IRACP) including borrower/beneficiary wise classification, provisioning for standard as well as restructured assets, NPA ageing, etc. A comparison (as per the template in Appendix) between provisions required under IRACP and impairment allowances made under Ind AS 109 should be disclosed by NBFCs in the notes to their financial statements to provide a benchmark to their Boards, RBI supervisors and other stakeholders, on the adequacy of provisioning for credit losses.

Where impairment allowance under Ind AS 109 is lower than the provisioning required under IRACP (including standard asset provisioning), NBFCs shall appropriate the difference from their net profit or loss after tax to a separate ‘Impairment Reserve’. The balance in the ‘Impairment Reserve’ shall not be reckoned for regulatory capital. Further, no withdrawals shall be permitted from this reserve without prior permission from the Department of Supervision, RBI.

The requirement for ‘Impairment Reserve’ shall be reviewed, going forward.

3. Computation of Regulatory Capital and Regulatory Ratios

In determining ‘owned funds’, ‘net owned funds’ and ‘regulatory capital’, NBFCs shall be guided by the following:

Any net unrealised gains arising on fair valuation of financial instruments, including such gains arising on transition to Ind AS, should not be included in owned funds whereas all such net losses should be considered. In determining the net unrealised gains for reduction from owned funds, NBFCs should categorise financial assets measured at fair value into two categories viz.

Investments in shares of other NBFCs and in shares, debentures, bonds, etc. in Group companies that are required to be reduced while

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determining Tier I Capital as defined in paragraph 2(xxxii) of these Directions ; and

B. Others

While netting may be done within the aforementioned categories, net gains from one category should not be offset against losses in the other category. Unrealized gains/losses shall be considered net of the effect of taxation.

Any unrealised gains or losses recognised in equity due to (a) own credit risk and (b) cash flow hedge reserve shall be derecognised while determining owned funds.

The unrealised gain/loss on a derivative transaction undertaken for hedging may be offset against the unrealised loss/gain recognized in the capital (either through Profit or Loss or through Other Comprehensive Income) on the corresponding underlying hedged instrument. If after such offset and netting with unrealised gains/losses on other financial instruments, there are still net unrealised gains, the same should be excluded from regulatory capital.

Since unrealised gains on category A have been excluded in computation of owned fund, NBFCs shall reduce the lower of acquisition cost or fair value of investments/advances in subsidiaries/other group companies and other NBFCs while determining Tier I capital as specified in paragraph 2(xxxii) of the aforementioned Master Directions. Net unrealised gains on Category B (i.e. ‘Others’) to the extent they have been excluded in regulatory capital, shall also be reduced from risk weighted assets.

Where NBFCs use fair value as deemed cost at the date of transition with respect to Property, Plant and Equipment (PPE) in terms of Ind AS 101, and the difference between the deemed cost and the current carrying cost is adjusted directly in retained earnings, any fair value gains upon such transition shall be reckoned as Tier II capital for NBFCs at a discount of 55 percent.

12 month expected credit loss (ECL) allowances for financial instruments i.e. where the credit risk has not increased significantly since initial recognition,

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shall be included under general provisions and loss reserves in Tier II capital within the limits specified by extant regulations. Lifetime ECL shall not be reckoned for regulatory capital (numerator) while it shall be reduced from the risk weighted assets.

Securitised assets not qualifying for de-recognition under Ind AS due to credit enhancement given by the originating NBFC on such assets shall be risk weighted at zero percent. However, the NBFC shall reduce 50 per cent of the amount of credit enhancement given from Tier I capital and the balance from Tier II capital.

Regulatory ratios, limits and disclosures shall be based on Ind AS figures. Impaired assets and restructured assets shall be considered as non-performing assets (NPA) for calculation of NPA ratios.

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Template for Disclosure in Notes to Financial StatementsAppendix

AssetLossDifference

GrossAllowancesProvisionsbetween Ind

classifica

Asset Classification as per RBICarrying(Provisions)Net Carryingrequired asAS 109

tion as

NormsAmount asas requiredAmountper IRACPprovisions

per Ind

per Ind ASunder Ind ASnormsand IRACP

AS 109

109norms

(1)(2)(3)(4)(5)=(3)-(4)(6)(7) = (4)-(6)

Performing Assets

StandardStage 1

Stage 2

Subtotal

Non-Performing Assets (NPA)

SubstandardStage 3

Doubtful - up to 1 yearStage 3

1 to 3 yearsStage 3

More than 3 yearsStage 3

Subtotal for doubtful

LossStage 3

Subtotal for NPA

Other items such as guarantees,Stage 1

loan commitments, etc. which areStage 2

in the scope of Ind AS 109 but

not covered under current IncomeStage 3

Recognition, Asset Classification

and Provisioning (IRACP) norms

Subtotal

Stage 1

TotalStage 2

Stage 3

Total

*******

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