Documentation expected to reflect new NBFC rules

The Indian banking sector has witnessed a paradigm shift in the past decade. Non-banking financial companies (NBFCs) have played a pivotal role in providing an array of financial services and innovative products, and have contributed significantly in meeting the credit needs of the corporate sector, small borrowers and other segments generally neglected by banks.

With a view to address risks faced by NBFCs, plug regulatory gaps arising from differential regulations (both within the sector and vis-à-vis other financial institutions) and strengthen governance standards, the Reserve Bank of India (RBI) has, based on recommendations of two working group reports, prescribed certain changes in the current regulatory framework applicable to NBFCs.

Funds & assets

At present, the minimum net owned fund (NOF) is ₹20 million (US$325,000) for new NBFCs and ₹2.5 million for NBFCs in existence before 21 April 1999. In order to strengthen the financial sector and encourage technology adoption, all NBFCs will be required to attain a minimum NOF of ₹20 million before the end of March 2017. Non-adherence to this requirement will result in cancellation of the NBFC’s certificate of registration.

In reference to loans, any asset owned by an NBFC which remains overdue for a period of six months or more has been classified as a non-performing asset (NPA) as compared to 90 days in the case of banks. NBFCs now will have to mark a loan as an NPA if the interest has not been paid in 90 days or three months. This directive will come into force from March 2018 and is intended to be implemented in a phased manner.

Khaitan Sud & Partners is a fast growing law firm providing specialist legal services to both domestic and international clients. Bhumika Tripathi is an associate at the firm.