RBI /2004-05/14 DBOD / IECS.No. 7 /08.12.01/2004-2005 July
1, 2004 Chairman and Managing Director/ Chief Executives of all
Commercial Banks Dear Sir, Master Circular - Lending to Non-Banking
Financial Companies (NBFCs) Please refer to our
Master
circular No. 9 /08.12.01/2003-04 dated March 11, 2004 on the captioned subject.
The enclosed Master Circular consolidates and updates all the instructions issued
by the Department on the subject till date. Yours faithfully, (A.Sreekumaran)
Deputy General Manager Encl. As above
Master
Circular on Lending to NBFCs 1. GENERAL 1.1
Reserve Bank of India has been regulating the financial activities of the Non-Banking
Financial Companies under the provisions of Chapter III B of the Reserve Bank
of India Act, 1934. 1.2 With the amendment
of the Reserve Bank of India Act, 1934 in January 1997, in terms of Section 45
IA of the said Act, all Non-Banking Financial Companies have to be mandatorily
registered with the Reserve Bank of India.
2.
BANK FINANCE TO REGISTERED NBFCs In the
context of mandatory registration of NBFCs with the Reserve Bank, as also consistent
with the policy of bestowing greater operational freedom to banks in the matter
of credit dispensation, the ceiling on bank credit linked to Net Owned Fund (NOF)
of such companies has been withdrawn in respect of all NBFCs which are statutorily
registered with RBI and are engaged in principal business of equipment leasing
(EL), hire-purchase (HP), loan and investment activities. 3.
BANK FINANCE TO NBFCs NOT REQUIRING REGISTRATION In
respect of NBFCs which do not require to be registered with RBI, [viz. i) Insurance
Companies registered under Section 3 of the Insurance Act, 1938; ii) Nidhi Companies
notified under Section 620A of the Companies Act, 1956; iii) Chit Fund Companies
carrying on Chit Fund business as their principal business as per Explanation
to Clause (vii) of Section 45-I(bb) of the Reserve Bank of India Act, 1934; iv)
Stock Broking Companies/Merchant Banking Companies registered under Section 12
of the Securities & Exchange Board of India Act; and v) Housing Finance Companies
being regulated by the National Housing Bank (NHB) which have been exempted from
the requirement of registration by RBI], banks
may take their credit decisions on the basis of usual factors like the purpose
of credit, nature and quality of underlying assets, repayment capacity of borrowers
as also risk perception, etc. 4.
BANK FINANCE TO RESIDUARY NON-BANKING COMPANIES (RNBCs) 4.1
Residuary Non-Banking Companies (RNBCs) are also required to be mandatorily registered
with Reserve Bank of India. In respect of such companies registered with RBI,
bank finance would be restricted to the extent of their Net Owned Fund
(NOF). 4.2 Net Owned Fund (NOF) 4.2.1
Banks should follow the definition of NOF as given in the explanation to Section
45-IA of the Reserve Bank of India Act, 1934, i.e., I. Net
Owned Fund means (a) the aggregate of
the paid-up equity capital and free reserves as disclosed in the latest balance
sheet of the company after deducting therefrom (i) accumulated
balance of loss; (ii) deferred revenue
expenditure; and (iii) other intangible
assets; and
(b) further
reduced by the amounts representing (1) investment
of such company in shares of (i) its
subsidiaries; (ii) companies in the
same group; (iii) all other Non-Banking
Financial Companies; and
(2) the
book value of debentures, bonds, outstanding loans and advances (including hire
purchase and lease finance) made to, and deposits with (i) subsidiaries
of such company; and (ii) companies
in the same group, to the extent such amount exceeds ten percent of (a) above
II. 'subsidiaries' and 'companies in the same group' shall have the same meanings
assigned to them in the Companies Act, 1956 (1of 1956).
5.
ASSESSMENT OF WORKING CAPITAL 5.1
Banks may assess and provide need-based finance to NBFCs referred to above, within
the prudential guidelines and exposure norms prescribed by the Reserve Bank subject
to the condition that the activities indicated in paragraph 6 are not financed
by them. Banks should lay down transparent policy and guidelines for credit dispensation
in respect of NBFCs with the approval of their Boards. 5.2
Banks should ensure that lending to Non-Banking Financial Companies (including
bill discounting / rediscounting) is part of the overall working capital credit
limit sanctioned to such companies after proper appraisal of their genuine working
capital needs. 5.3
In the light of the above, the instructions/guidelines issued in the past by RBI
regarding assessment of working capital credit needs of equipment leasing and
hire purchase finance companies, based on the concept of Maximum Permissible Bank
Finance (MPBF), have ceased to be mandatory.
6.
Activities Not Eligible for Bank Credit 6.1
The following activities undertaken by NBFCs, are not eligible for bank credit: (i)
Bills discounted/rediscounted by NBFCs, except for rediscounting of bills
discounted by NBFCs arising from sale of -
- commercial vehicles (including light
commercial vehicles), and
- two wheeler and three wheeler vehicles, subject
to the following conditions:
- the bills should have been drawn
by the manufacturer on dealers only;
- the bills should represent genuine
sale transactions as may be ascertained from the chassis/engine number; and
- before
rediscounting the bills, banks should satisfy themselves about the bona fides
and track record of NBFCs which have discounted the bills.
- Investments
of NBFCs both of current and long-term nature, in any company/entity by way of
shares, debentures, etc. However, Stock Broking Companies may be provided need-based
credit against shares and debentures held by them as stock-in-trade.
- Unsecured
loans/ inter-corporate deposits by NBFCs to/in any company.
- All types
of loans and advances by NBFCs to their subsidiaries, group companies/entities.
- Finance
to NBFCs for further lending to individuals for subscribing to Initial Public
Offerings (IPOs)
- Banks are precluded from granting term loans for acquisition
of existing assets (except imported second hand machinery). Bank finance to leasing
concerns should cover purchases of only new equipment. Banks should not extend
finance against existing assets whether by way of term loans for purchase of such
assets or by way of finance to leasing companies for purchase and release of such
assets.
6.2 Leased
and Sub-Leased Assets
- Banks should
not enter into lease agreements departmentally with equipment leasing companies
as well as other Non-Banking Financial Companies engaged in equipment leasing.
- As
banks can only support lease rental receivables arising out of lease of equipment/machinery
owned by the borrowers, lease rentals receivables arising out of sub-lease of
an asset by a Non-Banking Non Financial Company (undertaking nominal leasing activity)
or by a Non-Banking Financial Company should be excluded for the purpose of computation
of bank finance for such company.
7. PROHIBITION ON BRIDGE
LOANS/INTERIM FINANCE 7.1
Banks should not grant bridge loans of any nature, or interim finance against
capital/debenture issues and/or in the form of loans of a bridging nature pending
raising of long-term funds from the market by way of capital, deposits, etc. to
all categories of Non-Banking Financial Companies, i.e., equipment leasing and
hire-purchase finance companies, loan and investment companies and also Residuary
Non-Banking Companies (RNBCs). 7.2 Banks
should strictly follow these instructions and ensure that these are not circumvented
in any manner whatsoever by purport and/or intent by sanction of credit under
a different nomenclature like unsecured negotiable notes, floating rate interest
bonds, etc., as also short-term loans, the repayment of which is proposed/expected
to be made out of funds to be or likely to be mobilised from external/other sources
and not out of the surplus generated by the use of the asset(s).
Appendix Master
Circular LENDING TO NON-BANKING FINANCIAL COMPANIES
(NBFCs) List of Circulars Consolidated in the Master
Circular
No. |
Circular No. |
Date |
Subject |
Para No. |
1. |
IECD.No.29/08.12.01/98-99 |
25.05.99 |
Lending to Non-Banking Financial Companies (NBFCs) |
2, 3, 4.1, 5.1, 5.4.1 |
2. |
IECD.No.15/08.12.01/97-98 |
04.11.97 |
Guidelines for Lending by Banks - Assessment of Working
Capital | 5.3 |
3. |
IECD.No.17/03.27.026/96-97 |
06.12.96 |
Bank Finance for Purchase/Lease of Existing Assets |
5.4.1(vi) |
4 |
DBOD.No.FSC.BC.101/24.01.001/95-96 |
20.09.95 |
Equipment Leasing, Hire Purchase and Factoring etc.
Activities | 5.4.2 |
5. |
IECD.No.42/08.12.01/94-95 |
21.04.95 |
Lending to Non-Banking Financial Companies |
6.1, 6.2 |
6 |
DBOD.No.FSC.BC.71/C.469/91-92 |
22.01.92 |
Restriction on Credit to Certain Sectors |
5.2 |
7. |
IECD.No.14/08.12.01/94-95 |
28.09.94 |
Lending to Non-Banking Financial Companies |
6.1 | List
of Other Circulars containing Instructions/Guidelines/ Directives related
to Non-Banking Financial Companies (NBFCs)
No. |
Circular No. |
Date |
Subject |
Para No. |
1. | DBOD.No.Dir.BC.107/13.07.05/98-99 |
11.11.98 |
Rediscounting of Bills by Banks |
5.4.1 (i) (a) |
2. | DBOD.No.Dir.BC.173/13.07.05/99-2000 |
12.05.2000 |
Rediscounting of Bills by Banks |
5.4.1 (i) (b) |
3. | DBOD.No.Dir.BC.90/13.07.05/98 |
28.08.98 |
Bank Finance against Shares & Debentures |
5.4.1 (ii) |
4. | DBOD.No.BP.BC.51/21.04.137/
2000-01 | 10.11.2000 |
Bank Financing of Equities and Investment in Shares |
5.4.1 (v) |
Index
to Key Words
Words |
Page No. |
Registered NBFCs |
1 |
Residuary Non-Banking Companies (RNBCs) |
1 |
Net Owned Fund (NOF) |
2 |
Working Capital |
2 |
Leased and Sub-Leased Assets |
3 |
Bridge Loan/Interim Finance |
4 |
|