Notes Non-Banking System PDF

🏦 Notes Non-Banking System 1.0 Non-banking financial Companies (NBFCs) 1.1 Meaning 1.2 Sources of funding for NBFCs 1.3 Classification of NBFCs 1.3.1 Classification of NBFCs based on Deposit Acceptance...

🏦 Notes Non-Banking System 1.0 Non-banking financial Companies (NBFCs) 1.1 Meaning 1.2 Sources of funding for NBFCs 1.3 Classification of NBFCs 1.3.1 Classification of NBFCs based on Deposit Acceptance 1.3.2 Classification of NBFCs based on Activity 1.4 Regulations of NBFCs 1.4 Scale- based Framework 2.0 Peer-to-Peer (P2P) Lending 3.0 NBFC- Micro Finance Institutions 4.0 Core Investment Companies (CICs) 5.0 Asset Finance Company (AFC) 6.0 Infrastructure Debt Fund - Non-Banking Financial Company (IDF-NBFC) 7.0 Infrastructure Finance Company (IFC) 1.0 Non-banking financial Companies (NBFCs) 1.1 Meaning Non-Banking Financial Companies (NBFCs) are the financial institutions, which are not banks but perform bank like functions especially the financial intermediation by mobilising the funds and extending credit. They play a critical role in the financial system by providing last mile credit intermediation, absorbing and diversifying risks by catering to segments not serviced by banks and pioneering innovative financial products. Notes Non-Banking System 1  Thus, a ‘financial institution’ that is a company is an NBFC. The term financial institution means any non-banking institution that carries on as its business (or part of its business) any of the following activities (‘financial activities’): Lending or financing for activities other than its own Acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority Leasing or hire-purchase Insurance business Chit business Collection of money Acceptance of deposits It does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. An NBFC is a company registered under the Companies Act, 1956 of India, engaged in the business of loans and advances, acquisition of shares, stock, bonds, hire-purchase, insurance business or chit-fund business. Types of NBFCs/Activities Regulated by Venture Capital Fund, Merchant Banking Companies, Stock Broking Companies, Securities and Exchange 1. Mutual Funds, Collective Investment Board of India (SEBI) Schemes (CIS) Insurance Regulatory and 2. Insurance Companies Development Authority (IRDA) Pension Fund Regulatory 3. Pension Funds and Development Authority (PFRDA) Notes Non-Banking System 2  Types of NBFCs/Activities Regulated by Ministry of Corporate 4. Mutual Benefit Companies, Nidhi Companies Affairs (MCA) 5. Chit Funds State Governments How are NBFCS different from banks? NBFCs cannot accept demand deposits. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself. Deposit insurance facility of DICGC is not available to depositors of NBFCs. Requirements for registration with RBI In order to register as an NBFC with the RBI, a company should – be a company registered under Section 3 of the Companies Act, 1956 have a minimum Net Owned Funds (NOF) of Rs. 2 crores 1.2 Sources of funding for NBFCs NBFCs obtain funds from the following sources – External commercial borrowing – limited level Issuance of bonds Borrowing from clients Borrowing from banks Borrowing from NABARD, NHB, SIDBI, etc. 1.3 Classification of NBFCs Broadly, NBFCs can be categorised in the following ways – 1. Based on deposit acceptance 2. Based on activity 3. Based on size Notes Non-Banking System 3  Liability: In terms of the type of liabilities, NBFCs can be classified as Deposit and Non-Deposit Accepting NBFCs. Size: Non deposit (ND) taking NBFCs can be classified by their size into systemically important (SI) [An NBFCs-ND is categorized as systemically important (i.e., NBFC-ND-SI) if its asset size is ₹ 500 crore or more] and other non-deposit holding companies (NBFC-NDSI and NBFC-ND). Activity: NBFCs can also be classified based on the kind of activities they conduct. 1.3.1 Classification of NBFCs based on Deposit Acceptance NBFCs accepting public deposit (NBFCs-D) NBFCs-D are subjected to certain bank-like prudential regulations on various aspects such as income recognition, asset classification and provisioning; capital adequacy; prudential exposure limits and accounting/disclosure requirements. Presently, the maximum rate of interest an NBFC can offer is 12.5%. The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand. NBFCs also have to maintain SLR @ 15 % as a percentage of deposits. However, there is no CRR prescription for NBFCs. NBFCs not accepting public deposit (NBFCs-ND) NBFCs-ND are regulated in a limited manner. However, with the opening up of foreign direct investment in NBFCs and the opportunities for credit growth in the economy, the sector has witnessed the entry of some large companies in the category of NBFC-ND. In view of the above, NBFCs-ND with an asset size of Rs. 500 crores and above are classified as Systemically Important (NBFC-ND-SI) and are required to comply with exposure and capital adequacy norms. 1.3.2 Classification of NBFCs based on Activity Notes Non-Banking System 4  Based on their activities, NBFCs can be classified as – NBFC Investment and Credit Company (NBFC-ICC) Infrastructure Finance Company (IFC) Systemically Important Core Investment Company (CIC-ND-SI) Infrastructure Debt Fund NBFC (IDF-NBFC) NBFC - Micro Finance Institution (NBFC-MFI) NBFC - Factors (NBFC-Factors) Mortgage Guarantee Companies (MGC) NBFC - Non-operative Financial Holding Company (NBFC-NOFHC) Account Aggregators (AA) Peer-to-Peer (P2P) Lending Platforms Housing Finance Companies (HFC) Note: To provide NBFCs with greater operational flexibility, in 2019, the RBI decided to merge the three categories of NBFCs viz. Asset Finance Companies (AFC), Loan Companies (LCs) and Investment Companies (ICs) into a new category called NBFC - Investment and Credit Company (NBFC-ICC). NBFC-MFI is a non-deposit taking NBFC with minimum NOF of Rs. 5 crores. Types of NBFCs based on their Activities An AFC is a company which is a financial institution carrying on its principal business of Asset Finance financing real/physical assets supporting 1. Company (AFC) economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively. IC means any company which is a financial Investment 2. institution carrying on as its principal business Company (IC) the acquisition of securities. Notes Non-Banking System 5  Types of NBFCs based on their Activities LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making 3. Loan Company (LC) loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company. IFC is a non-banking finance company which deploys at least 75 per cent of its total assets Infrastructure in infrastructure loans, has a minimum Net 4. Finance Company Owned Funds of ₹ 300 crore, and has a (IFC) minimum credit rating of ‘A ‘or equivalent with a CRAR of 15%. Systemically CIC-ND-SI is an NBFC carrying on the Important Core business of acquisition of shares and 5. Investment securities which satisfies the certain Company (CIC-ND- prescribed conditions. SI) IDF-NBFC is a company registered as NBFC to Infrastructure Debt facilitate the flow of long-term debt into Fund - Non- Banking 6. infrastructure projects. Only Infrastructure Financial Company Finance Companies (IFC) can sponsor IDF- (IDF-NBFC) NBFCs. Non-Banking NBFC-MFI is a non-deposit taking NBFC Financial Company - having not less than 75% of its assets in the 7. Micro Finance nature of Qualifying assets (explained at the Institution (NBFC- end) which provides Collateral free loans to MFI) small borrowers. Non-Banking NBFC-Factor is a non-deposit taking NBFC Financial Company – 8. engaged in the principal business of factoring Factors (NBFC- i.e. financing of receivables. Factors) 9. Mortgage Guarantee MGC are financial institutions for which at least Companies (MGC) 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee Notes Non-Banking System 6  Types of NBFCs based on their Activities business and they Provide mortgage guarantees for loans. NOFHC is financial institution through which promoter / promoter groups will be permitted NBFC- Non- to set up a new bank. It’s a wholly-owned Non- Operative Financial 10. Operative Financial Holding Company Holding Company (NOFHC) which will hold the bank as well as all (NOFHC) other financial services companies regulated by RBI or other financial sector regulators. They Provide service of retrieving, consolidating, organising and presenting financial information of its customer. They can Account only provide account aggregation services 11. Aggregators (AA) where they act as intermediaries between companies seeking financial information of its customers and those holding that data (financial information providers). “Non-banking financial company - Peer to Peer Lending Platform” (NBFC-P2P) means a non-banking institution which carries on the Peer-to-Peer (P2P) business of a Peer to Peer i.e., providing loan 12. Lending Platforms facilitation services to participants on the platform. They only provide platform to connect lenders and borrowers and there is no lending from its own books. Housing Finance They carry on the business of providing 13. Companies (HFC) finance for housing and housing projects. Exemptions from RBI Regulation It is quite clear from the definition of NBFCs that even entities such as insurance companies and stock broking companies are NBFCs. However, these entities are regulated by other regulators. Therefore, to avoid dual regulation, the RBI has exempted various categories of NBFCs which are regulated by other regulators/ government from Notes Non-Banking System 7  registration and/or other requirements. 1.4 Regulations of NBFCs Earlier Regulations Regulations – 1963 RBI acquired regulatory and supervisory powers over NBFCs with the insertion of Chapter III-B in the RBI Act in 1963. The insertion was made because the then existing enactments relating to banks did not provide for any control over companies or institutions, which, although are not treated as banks, accept deposits from the general public or carry on other business which is allied to banking. The changes were needed for ensuring more effective supervision and management of the non-banking companies or institutions. Regulation – 1997 Onwards The regulation of NBFCs started by RBI in 1963 failed to properly regulate the deposit taking activity of NBFCs and in 1996 we observed the failure of a large NBFC (CRB Capital). Thus, some important amendments were carried out in 1997 like: Categorisation of NBFCs into (i) public deposit accepting, (ii) non-public deposit accepting but engaged in loan, investment, hire-purchase and equipment leasing, and (iii) non-public deposit accepting core investment companies that acquire securities/ shares in their own group companies comprising not less than 90 per cent of their total assets but not trading in these securities/ shares Compulsory registration with RBI and maintenance of minimum Net Owned Fund (NOF) for companies satisfying the ‘principal business’ criteria. Maintenance of liquid assets by NBFCs accepting public deposits Creation of a Reserve Fund by all NBFCs by transfer of 20 per cent of their net profit every year Powers of RBI to determine Policy and issue directions to NBFCs Notes Non-Banking System 8  Conduct of Special Audit of the accounts of NBFCs etc. The Reserve Bank tightened the regulatory structure over the NBFCs, with rigorous registration requirements, enhanced reporting, and supervision. The Bank also took a policy stance to not register new public deposit accepting NBFCs and encourage the existing ones to convert to non-deposit taking NBFCs. Further, in 1999 capital requirement for fresh registration was enhanced from ₹ 25 lakh to ₹ 2 crore. In 2006, considering the increasing significance of the sector, the Reserve Bank introduced differential regulation and classified NBFCs with asset size of ₹ 100 crore and above as ‘Systematically Important NBFC-ND (NBFC-ND-SI)’. Prudential regulations such as capital adequacy requirements and exposure norms were made applicable to them. Revised Regulatory Framework – 2014 The regulatory framework for the sector was reviewed in 2014. The key changes in the revised regulatory framework were as follows: Requirement of minimum NOF of ₹ 2 crore for legacy NBFCs. Revision of the threshold of systemic importance from ₹100 crore to ₹ 500 crore and inclusion of multiple NBFCs within the same group. Differentiated regulatory approach based on customer interface and source of funds. At one end of the spectrum, entities with asset size less than ₹500 crore and not accessing public funds with no customer interface were exempted from prudential and business conduct regulations. At the other end, entities accessing public funds with customer interface were subjected to full slew of regulations. Harmonization of asset classification norms for Deposit taking Non-Banking Financial Company (NBFC-D) and Systemically Important Non-Deposit taking Non-Banking Financial Company (NBFC-ND-SI) with banks. Notes Non-Banking System 9  Review of corporate governance and disclosure norms leading to constitution of Board Committees (Audit Committee, Nomination Committee, and Risk Management Committee) and rotation of audit partners every three years applicable for NBFC-D and NBFC-ND. Regulations – 2019 In 2019, certain amendments enumerated below were again carried out to Chapter III-B of the RBI Act, which strengthened RBI’s supervisory powers. Reserve Bank may notify different amount of NOF to different categories of NBFCs with minimum NOF between ₹ 25 lakh and ₹ 100 crore RBI can remove Directors of NBFC (other than Government owned NBFCs) RBI can supersede the BOD of NBFC (other than Government owned NBFCs RBI can remove or debar an auditor of NBFC for a max. period of 3 years at a time Resolution of NBFCs through amalgamation, reconstruction, splitting into various activities, etc. Recent Regulations – 2021 Failure of any large and deeply interconnected NBFC is capable of transmitting shocks into the entire financial sector and cause disruption. Under the circumstances, regulatory framework for NBFCs needs to be reoriented to keep pace with the changing realities. The Reserve Bank of India (RBI) has proposed to tighten rules for major non- bank lenders to prevent a collapse in one of them from affecting the financial system. The RBI has proposed to classify the non-banking financial companies (NBFCs) into four categories, depending on their systemic importance and potential risk to the stability of the financial system. The triggers for such an action are: 1. Comprehensive Risk Perception: Once an NBFC crosses the thresholds for identified parameters (size, leverage, interconnectedness, complexity, and supervisory inputs), it should be subject to proportionately higher regulation. Notes Non-Banking System 10  2. Size of Operations: If the balance sheet size of an NBFC breaches a certain threshold, as identified by the Reserve Bank, it should be regulated at a higher pedestal, as it will have higher in-built degree of systemic significance. 3. Activity of NBFCs: Certain NBFCs are unlikely to pose any systemic risk on account of their activities and hence could be regulated relatively lightly. For eg NBFCs that do not have either access to public funds or NBFCs like NBFC- P2P lending platforms, NOFHC (bank holding company) that don’t pose systemic risk. 1.4 Scale- based Framework Over the years, the NBFCs sector has undergone considerable evolution in terms of size, complexity, and interconnectedness within the financial sector. In order to align the regulatory framework for NBFCs keeping in view their changing risk profile, the RBI introduced a revised regulatory framework for NBFCs, in 2021. The framework can be understood in the form of a pyramid – Base Layer NBFCs: NBFCs with assets of up to Rs. 1,000 crores (from earlier Rs. 500 crore) The Base Layer shall comprise of (a) non-deposit taking NBFCs below the asset size of ₹1000 crore and (b) NBFCs undertaking the following activities- (i) NBFC-Peer to Peer Lending Platform (NBFC-P2P), (ii) NBFC-Account Aggregator (NBFC-AA), (iii) Non-Operative Financial Holding Company (NOFHC) and (iv) NBFCs not availing public funds and not having any customer interface. RBI has raised the net-owned funds requirement for these NBFCs to ₹10 crore from ₹2 crore earlier and also proposed that they can transition to the new regulation over a period of five years. The existing non-performing loan classification norm for these NBFCs will be changed to 90 days from 180 days now. Middle Layer NBFCs: Notes Non-Banking System 11  The Middle Layer shall consist of (a) all deposit taking NBFCs (NBFC-Ds), irrespective of asset size, (b) non-deposit taking NBFCs with asset size of ₹1000 crore and above and (c) NBFCs undertaking the following activities (i) Standalone Primary Dealers (SPDs), (ii) Infrastructure Debt Fund - Non- Banking Financial Companies (IDF-NBFCs), (iii) Core Investment Companies (CICs), (iv) Housing Finance Companies (HFCs) and (v) Infrastructure Finance Companies (NBFC-IFCs). The regulatory regime for this layer shall be stricter compared to the base layer. RBI has proposed no changes to the existing capital requirement for these NBFCs, which currently stands at 15% with minimum tier-I of 10%. The regulator has suggested that NBFCs with 10 or more branches will be required to adopt core banking solution. It has also put certain restrictions on lending. These NBFCs cannot provide loans to companies for buyback of securities. Upper Layer NBFCs Going further, the next layer can consist of NBFCs which are identified as systemically significant. This layer will be populated by NBFCs which have large potential of systemic spill-over of risks and have the ability to impact financial stability. These NBFCs will have to implement differential standard asset provisioning and also the large exposure framework as applicable to banks. Scheduled commercial banks are on a Basel III framework which provides for minimum requirements for Common Equity Tier 1 (CET 1) capital. It is felt that CET 1 could be introduced for NBFC-UL to enhance the quality of regulatory capital. Top Layer This layer is currently empty. However, RBI can move an NBFC to this category if it feels that there is an unsustainable increase in the systemic risk spill-overs from specific NBFCs in Notes Non-Banking System 12  the upper layer. These NBFCs will be subject to higher capital charge, including capital conservation buffers. 2.0 Peer-to-Peer (P2P) Lending Peer-to-peer lending, also referred to as P2P lending, is an alternative financing method which allows individuals to avail loans from other individuals through online lending platforms. Through these platforms, borrowers who seek unsecured personal loans can get in touch with investors who are willing to lend to them with the intention of earning a higher return on their investments. P2P lending platforms let investors go through a list of verified borrowers and their details before they lend to them. RBI Guidelines for P2P Lending As per RBI directions, “Peer to Peer Lending Platform” means an intermediary providing the services of loan facilitation via online medium or otherwise, to a person who has entered into an arrangement with an NBFC-P2P to lend on it or to avail of loan facilitation services provided by it. In order to be registered as NBFC-P2P, a company has to meet the following guidelines as prescribed by the RBI: NBFC-P2P should have a minimum net worth of Rs. 2 crores (Rs. 20 million). No NBFC-P2P should commence or carry on the business of a Peer-to-Peer Lending Platform without obtaining a Certificate of Registration (CoR) from RBI NBFC-P2P should maintain a Leverage Ratio not exceeding 2. The aggregate exposure of a lender to all borrowers at any point of time, across all P2P platforms, should be subject to a cap of Rs. 50 lakh. The aggregate loans taken by a borrower at any point of time, across all P2Ps, should be subject to a cap of Rs. 10 lakh. Notes Non-Banking System 13  The exposure of a single lender to the same borrower, across all P2Ps, should not exceed Rs. 50,000. The maturity of the loans should not exceed 36 months. In 2018, Faircent became the 1st P2P lending platform in India, to receive NBFC-P2P certification from the RBI. 3.0 NBFC- Micro Finance Institutions A Sub-Committee of the Central Board of the Reserve Bank (Chairman: Shri Y. H. Malegam) was constituted to study issues and concerns in the MFI sector. The Committee submitted its report in January 2011. In the Monetary Policy Statement 2011-12, it was announced that the broad framework of regulations recommended by the Committee has been accepted by the Bank. Accordingly, a separate category of NBFCs viz. Non-Banking Financial Company-Micro Finance Institution (NBFC-MFI) was formed and separate directions were issued containing the regulatory framework for NBFC-MFIs. Definition of NBFC-MFI An NBFC-MFI is defined as a non-deposit-taking NBFC (other than a company licensed under Section 25 of the Indian Companies Act, 1956) that fulfils the following conditions: i. Minimum Net Owned Funds of Rs.5 crore. (For NBFC-MFIs registered in the North Eastern Region of the country, the minimum NOF requirement shall stand at Rs. 2 crore). ii. Not less than 75% of its net assets are in the nature of “qualifying assets.” “Net assets” are defined as total assets other than cash and bank balances and money market instruments. “Qualifying asset” shall mean a loan which satisfies the following criteria:- a. A microfinance loan is defined as a collateral-free loan given to a household having annual household income up to ₹3,00,000. For this purpose, the household Notes Non-Banking System 14  shall mean an individual family unit, i.e., husband, wife and their unmarried children. All collateral-free loans, irrespective of end use and mode of application/ processing/ disbursal (either through physical or digital channels), provided to low-income households, i.e., households having annual income up to ₹3,00,000, shall be considered as microfinance loans. To ensure collateral-free nature of the microfinance loan, the loan shall not be linked with a lien on the deposit account of the borrower. b. Further, the limit on total indebtedness of the borrower has been increased from ₹1,00,000 to ₹1,25,000. In light of the revision to the limit on total indebtedness, the limits on disbursal of loans have been raised from ₹60,000 for the first cycle and ₹1,00,000 for the subsequent cycles to ₹75,000 and ₹1,25,000 respectively. These instructions shall come into effect from the date of this circular i.e 8 Nov 2019. c. tenure of the loan not to be less than 24 months for loan amount in excess of Rs. 30,000 with prepayment without penalty; d. loan to be extended without collateral; e. aggregate amount of loans, given for income generation, is not less than 50 percent of the total loans given by the MFIs f. loan is repayable on weekly, fortnightly or monthly installments at the choice of the borrower iii. Further the income an NBFC-MFI derives from the remaining 15 percent of assets shall be in accordance with the regulations specified in that behalf. iv. An NBFC which does not qualify as an NBFC-MFI shall not extend loans to micro finance sector, which in aggregate exceed 25% of its total assets. Notes Non-Banking System 15  Prudential Norms i. Capital Adequacy All new NBFC-MFIs shall maintain a capital adequacy ratio consisting of Tier I and Tier II Capital which shall not be less than 15 percent of its aggregate risk weighted assets. The total of Tier II Capital at any point of time, shall not exceed 100 percent of Tier I Capital. Fair Practices in Lending I. Transparency in Interest Rates a. There shall be only three components in the pricing of the loan viz. the interest charge, the processing charge and the insurance premium (which includes the administrative charges in respect thereof). b. There will be no penalty charged on delayed payment. c. NBFC-MFIs shall not collect any Security Deposit/ Margin from the borrower. d. There should be a standard form of loan agreement. e. Every NBFC-MFI should provide to the borrower a loan card reflecting (i) the effective rate of interest charged; (ii) all other terms and conditions attached to the loan; (iii) information which adequately identifies the borrower; and (iv) acknowledgements by the NBFC-MFI of all repayments including instalments received and the final discharge; (v) All entries in the Loan Card should be in the vernacular language. f. The effective rate of interest charged by the NBFC-MFI should be prominently displayed in all its offices and in the literature issued by it and on its website. II. Multiple-lending, Over-borrowing and Ghost-borrowers 1. NBFC-MFIs can lend to individual borrowers who are not member of Joint Liability Group(JLG)/Self Help Group(SHG) or to borrowers that are members of JLG/SHG. 2. a borrower cannot be a member of more than one SHG/JLG. Notes Non-Banking System 16  3. not more than two NBFC-MFIs should lend to the same borrower. 4. there must be a minimum period of moratorium between the grant of the loan and the due date of the repayment of the first instalment. The moratorium shall not be less than the frequency of repayment. For eg: in the case of weekly repayment, the moratorium shall not be less than one week. 5. recovery of loan given in violation of the regulations should be deferred till all prior existing loans are fully repaid. 6. All sanctioning and disbursement of loans should be done only at a central location and more than one individual should be involved in this function. In addition, there should be close supervision of the disbursement function. Formation of SRO The Malegam Committee has recommended greater responsibility to be placed on industry associations for monitoring of regulatory compliance. All NBFC-MFIs are encouraged to become member of at least one Self-Regulatory Organization (SRO) which is recognized by the Reserve Bank and will also have to comply with the Code of Conduct prescribed by the SRO. 4.0 Core Investment Companies (CICs) 1. What is a Systemically Important Core Investment Company (CIC-ND-SI)? Ans. A CIC-ND-SI is a Non-Banking Financial Company (i) with asset size of Rs 100 crore and above (ii) carrying on the business of acquisition of shares and securities and which satisfies the following conditions as on the date of the last audited balance sheet :- (iii) it holds not less than 90% of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies; (iv) its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its net assets as mentioned in clause (iii) above; Notes Non-Banking System 17  (v) it does not trade in its investments in shares, bonds, debentures, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment; (vi) it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies. (vii) it accepts public funds 5.0 Asset Finance Company (AFC) As per RBI, any non-banking company can act as an asset finance company, subject to, the income arising from the aggregate of physical assets supporting the economic activity is not less than 60% of its total assets and total income respectively. Once the companies satisfy this condition can visit the regional office in the jurisdiction where their registered office is located along with their certificate of registration as issued by the bank to classify them as the asset finance companies. 6.0 Infrastructure Debt Fund - Non-Banking Financial Company (IDF-NBFC) An IDF is set up either as a trust or as a company. A trust based IDF is registered as an IDF-Mutual Fund (IDF-MF) and is regulated by the Securities and Exchange Board of India (SEBI) whereas a company based IDF is registered as an IDF-NBFC and is regulated by the Reserve Bank of India (RBI). An IDF-NBFC means a non-deposit taking NBFC which is permitted to – (i) refinance post commencement operations date (COD) infrastructure projects that have completed at least one year of satisfactory commercial operations; and (ii) finance toll operate transfer (TOT) projects as the direct lender. Under the earlier guidelines, an IDF-NBFC was required to be sponsored by a bank or an NBFC-Infrastructure Finance Company (NBFC-IFC). The Notes Non-Banking System 18  requirement of a sponsor for an IDF-NBFC has now been withdrawn and shareholders of IDF-NBFCs shall be subjected to scrutiny as applicable to other NBFCs, including NBFC-IFCs. Earlier, IDF-NBFCs were required to enter into a tripartite agreement with the concessionaire and the project authority for investments in the Public Private Partnership (PPP) infrastructure projects having a project authority. The requirement of the tripartite agreement has now been made optional. Guidelines governing sponsorship of IDF-MFs by NBFCs All NBFCs shall be eligible to sponsor (sponsorship as defined by SEBI Regulations for Mutual Funds) IDF-MFs with prior approval of the RBI subject to the following conditions (based on the audited financial statements), in addition to those prescribed by SEBI: (i) The NBFC shall have a minimum NOF of ₹300 crore and CRAR of 15 percent; (ii) Its net NPAs shall be less than 3 per cent of the net advances; (iii) It shall have been in existence for at least 5 years; (iv) It shall be earning profits for the last three years and its performance shall be satisfactory; (v) The CRAR of the NBFC post investment in the IDF-MF shall not be less than the regulatory minimum prescribed for it; (vi) The NBFC shall continue to maintain the required level of NOF after accounting for investment in the proposed IDF-MF; (vii) There shall be no supervisory concerns with respect to the NBFC. 7.0 Infrastructure Finance Company (IFC) IFC is a non-deposit accepting loan company which complies with the following : 1. A minimum of 75 per cent of the total assets of an IFC-NBFC should be deployed in infrastructure loans; 2. The company should have minimum net-worth of Rs 300 crore, 3. The CRAR of of the company should be at 15% with Tier I capital at 10% and Notes Non-Banking System 19  4. The minimum credit rating of the company should be at 'A' or equivalent of CRISIL, FITCH, CARE, ICRA, BRICKWORK or equivalent rating by any other accrediting rating agencies. Notes Non-Banking System 20