The new lending restrictions state that unless approved by the board, mid-layer and upper-layer NBFCs may not lend more than Rs 5 crore to directors, CEOs or relatives of directors. Nor can they lend to companies in which one of their directors or their relatives is a partner, manager, employee or guarantor. The restrictions also apply to any company in which one of its directors or their relatives is a major shareholder, director, manager, employee or guarantor.
Under the RBI’s scale-based regulations, the top tier NBFCs are the top 10 companies and those identified by the central bank. All other NBFCs with assets above Rs 1,000 crore form the middle tier and the smaller ones form the base tier. The norms for upper tier financial firms could make it more difficult for NBFCs that are part of corporate groups to lend to companies within the group if they have common directors. The RBI has tightened norms for NBFCs in the wake of the IL&FS and DHFL outages. The stricter standards prompted HDFC to consider merging with HDFC Bank. It may also push other large lenders toward banking.
The RBI has also tightened norms for base-level NBFCs. These companies must report in their annual report loans made to companies in which the directors or their relatives have a significant interest. In addition, such loans can only be granted after approval by the Board of Directors. This move will help lenders control the diversion of funds through NBFCs in the group.
The central bank has restricted lending to the real estate sector. New standards require that loans can be granted after borrowers have first obtained government or other regulatory approvals for the project.
While the stricter lending standards apply to upper and middle layer finance companies, the new disclosure guidelines apply to all finance companies and will come into effect from the current financial year. Under the new corporate governance standards, even NBFCs that are not listed on stock exchanges are encouraged to make full disclosures in accordance with Sebi’s list of shares and disclosure standards.
NBFC’s balance sheet for fiscal year 2022-23 will include their exposure to commercial real estate, residential mortgages and investments in mortgage-backed securities. You must also declare investments in equity interests, including advances for any purpose where the security is equity. All intra-group risks must be disclosed in the balance sheets.
“Once identified as NBFC-UL (upper tier), unlisted NBFC-ULs are required to prepare a board-approved roadmap for compliance with a listed company’s disclosure requirements under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015,” the RBI said.
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