Government of India

Ministry of Finance
Department of Financial Services

Report of the Key Advisory Group

on the Non-Banking Finance Companies
(NBFCs)

31st January, 2012

F.No.17/7/2011-BO.II
Government of India
Ministry of Finance
Department of Financial Services
REPORT OF THE KEY ADVISORY GROUP (KAG)
ON THE NON-BANKING FINANCE COMPANIES (NBFCs)
Government constituted a Key Advisory Group (KAG) on the Non-Banking Finance
Companies (NBFCs) vide Order dated 30.09.2011. The constitution and terms of reference of
the Group is in ANNEX. The Group had representation from all the stakeholders from the sector
including the Indian Banks' Association, FICCI, CII and ASSOCHAM representing major NBFCs
in the Country; Ernst & Young, prominent Law firms viz. Amarchand Mangaldas, Juris Corp;
FIDC (a representative body of NBFCs) and also from some prominent NBFCs. The terms of
reference of the Group was as under

2.

i.

Review of existing legal / regulatory / institutional framework for NBFCs and its
efficacy;

ii.

Action plan including policy initiatives for orderly growth of the Sector;

iii.

To recommend the legal / institutional / regulatory initiatives related measures

required for orderly growth of the Sector.

Though RBI was included as a member of the KAG, they have expressed their inability

to be a part of the Group stating that the KAG is to essentially discuss and deliberate on the
Report of RBI Working Group, and therefore, their association with the Group may not be
desirable. The Group held its meetings on 8.10.2011 and 8.11.2011 and had extensive
deliberations and consultation on a wide range of issues having a bearing on orderly growth of
the sector. The draft Report was also discussed with the stakeholders, and has been modified
taking into consideration the views expressed by the stakeholders. Accordingly, the Report of
the Group has been finalised on 31.01.2012.
3.

The Group expresses its sincere gratitude to the team of Shri D.D. Maheshwari, Under

Secretary, Department of Financial Services for putting in unstinting efforts in organising the
meetings of the Group, facilitating deliberations, organising relevant information and finalizing its
Report.
(Alok Nigam)
Chairman
31st January, 2012
2

Contents
1.

Overview of the NBFC sector ...............................................................................................4

1.1
1.2
1.3
1.4

2.

Role and Vision for the NBFC sector ..................................................................................10

2.1
2.2
2.2.1
2.2.2
2.2.3
2.3
2.4
2.5
2.6

3.

Prior approval of RBI for mergers of NBFCs

Definition of Public Funds
Participative Financing
Fixed Deposits as Financial Assets
Banking credit for priority sector lending
ECB financing
Prudential norms for certain categories of NBFCs to be more relaxed
Lending to stock brokers and merchant banks

Recommendations - III ......................................................................................................23

5.1
Direct Tax Issues
5.1.1
5.1.2
5.1.3
5.1.4
5.1.5
5.1.6

6.

The RBI Working Group Report

Broader objective of RBI Working Group Report
Recommendations
General
Categorization of NBFCs

Recommendations - II .......................................................................................................19
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8

5.

Issues
Is there an economic role that the NBFCs fulfill?
Infrastructure financing
Serving unbanked customer segments
Strong understanding of customer segments and ability to deliver customized products
What kind of regulatory structure that can be envisaged for the sector?
What is the systemic risk posed by the sector and the progression curve for NBFCs?
Is there any additional category of NBFCs required?
Future growth and development of NBFCs

Recommendations of the Thorat Committee ....................................................................14

3.1
3.2
3.3
3.3.1
3.3.2

4.

Introduction
NBFCs - growth and evolution
Bank Exposure to NBFCs
Summing up

Tax Deduction at Source on Interest (Section 194A of the Income Tax Act)
Tax benefits for Income deferral under Section 43D of the Income Tax Act
Allowing of provisions made for Non-performing Assets (NPAs) under Section 36(1)(viia) of the
Income Tax Act
Declaration in Form 15G / 15H read with Section 206AA
Introduction of the threshold limit for TDS on the interest income on unlisted debentures
Depreciation in respect of Construction Equipments registered under the Motor Vehicles Act

5.2

Indirect Tax Issues

5.2.1
5.2.2

Extension of Cenvat credit rule to other services

Service Tax on Hire Purchase / Lease Transactions

Gist of recommendations.27

7. Conclusion...30
8. ANNEX - Order of Constitution of the Key Advisory Group on NBFCs...31

1.

Overview of the NBFC sector

1.1

Introduction

The Indian economy has been witnessing high rates of growth in the last few years. Financing
requirements have also risen commensurately and will continue to increase in order to support
and sustain the tremendous economic growth.
NBFCs have been playing a complementary role to the other financial institutions including
banks in meeting the funding needs of the economy. They help fill the gaps in the availability of
financial services that otherwise occur in bank-dominated financial systems. The gaps are in
regards the product as well customer and geographical segments.
NBFCs over the years have played a very vital role in the economy. They have been at the
forefront of catering to the financial needs and creating livelihood sources of the so-called unbankable masses in the rural and semi-urban areas. Through strong linkage at the grassroots
level, they have created a medium of reach and communication and are very effectively serving
this segment. Thus, NBFCs have all the key characteristics to enable the government and
regulator to achieve the mission of financial inclusion in the given time.
1.2

NBFCs growth and evolution

The number of NBFCs has decreased from 13,014 in FY06 to 12,409 in FY11 however the
sector has grown by 2.6 times between FY06 and FY11 at a CAGR of 21%. It accounted for
10.8% in terms of outstanding advances and 13% in terms of assets of the banking system in
FY06. This share has risen to 13.2% and 13.78% respectively in FY11. In terms of deposits the
share of public deposits held by NBFCs as compared to deposit base of banks has decreased
from 1.05% in FY06 to 0.22% in FY11.
Public deposits held by NBFCs have shown a falling trend, decreasing by approximately 48% in
the last 5 years, while owned funds (reserves & surplus and capital deployed) have gone up by
195%. The outstanding advances have grown approximately 3 times in the last 5 years to reach
Rs.536,074 crores in FY11. Banks exposure to NBFCs has increased from Rs.62,308 crore in
FY06 to Rs.183,839 crore in FY11, an increase of approximately 3 times growing at a CAGR of
24% during the period FY06-FY11 and a 37% increase over FY10.

SCBs include Regional Rural Banks and Co-operative Banks

NBFCs include NBFCs-D, NBFCs-ND-SI and RNBCs
All amounts in Rs.Crores

Table 1 Consolidated Balance Sheet of NBFCs*

FY06 (Rs.Cr)

FY10 (Rs.Cr)

FY11 (Rs.Cr)

% FY11

Share Capital

22,154

43,275

47,222

6%

Reserves & Surplus

47,741

1,39,312

1,58,683

19%

Public Deposits

22,842

17,352

11,964

1%

2,07,597

4,49,857

5,70,754

67%

62,308

1,31,720

1,83,839

22%

30,267

51,139

58,629

7%

Total Liabilities

3,30,601

7,00,935

8,47,252

100%

Loans and Advances

1,69,449

4,19,636

5,36,074

63%

45

45

89

0%

Hire Purchase Assets

44,715

41,685

50,019

6%

Investments

Borrowings
Of which Borrowings from Banks/FIs
Current liabilities and Provisions

Bill Business

81,630

1,52,183

1,64,130

19%

Cash & Bank Balances

NA

25,857

29,877

4%

Other Current Assets

NA

40,565

42,444

5%

Other Assets

34,762

20,965

24,619

3%

Total Assets

3,30,601

7,00,936

8,47,252

100%

*NBFCs include NBFC-D, NBFC-ND-SI and RNBCs (Residuary Non-Banking Companies)

Table 2 Comparison with Banking Sector

FY06 (Rs.Cr)
13,014
1,572,780
10.77%
2,531,462
13.06%
2,185,809
1.05%

No. of NBFCs
Bank credit of all Scheduled Banks*
NBFC advances as a % of Bank credit
Assets of all Scheduled Banks*
NBFC assets as a % of Bank assets
Deposits of all Scheduled Banks*
NBFC Public Deposits as a % of Bank Deposits

FY10 (Rs.Cr)
12,630
3,337,659
12.57%
5,258,495
13.33%
4,635,224
0.37%

FY11 (Rs.Cr)
12,409
4,060,843
13.20%
6,146,590
13.78%
5,355,160
0.22%

*Scheduled Banks include Scheduled commercial banks and Co-operative Banks

For FY06 - 218 and 71, Total 289, For FY11 - 163 and 69, Total 232

2
Dependence on Public Funds
Table 3 Sources of Funds of NBFCs
FY06 (Rs.Cr)
Share Capital
20,971
Reserves and Surplus
48,924
Public Deposits
22,842
Borrowings
207,597
Bank/FI borrowings
62,308
Debentures
68,138
Inter-corporate
Borrowings
19,459
Commercial Paper
13,123
Others
44,569
Total
300,334

FY10 (Rs.Cr)
40,444
142,233
17,352
449,857
131,720
156,107

FY11 (Rs.Cr)
44,234
161,671
11,964
570,754
183,839
205,320

FY06
7%
16%
8%
69%
21%
23%

FY10
6%
22%
3%
69%
20%
24%

FY11
6%
21%
2%
72%
23%
26%

22,153
31,049
108,828
649,886

24,883
32,321
124,391
788,623

6%
4%
15%
100%

3%
5%
17%
100%

3%
4%
16%
100%

Table 4 Public Funds as a percentage of Total Sources of Funds

FY06
NBFCs-D
NBFCs-ND-SI
RNBCs
Overall NBFC Sector

FY10
59.3%
59.4%
94.5%
61.9%

FY11
59.8%
53.6%
83.3%
55.1%

59.0%
57.8%
72.6%
58.1%

Public Funds (as defined by RBI) funds raised either directly or indirectly through public deposits, commercial papers,
debentures, inter-corporate deposits, guarantees and bank finance or any other debt instrument, but exclude funds raised
by issue of share capital and/ or instruments compulsorily convertible into equity shares

The dependence of NBFCs sector on public funds has gone down from approximately 62% in
FY06 to 58% in FY11. The share of public deposits to total funds has gone down from 8% to 2%
and Bank/FI borrowing has increased marginally from 22% to 23% during the same period.
With the development of capital markets, NBFCs have increasingly been tapping the corporate
debt markets with debentures issued growing from Rs.68,138 crores in (23% to total
borrowings) FY06 to Rs.1,87,568 crores (26% to total borrowings) in FY11. Banks exposure to
NBFC sector has been increasing and gone up approximately 3 times in the last 5 years. Apart
from lending banks also have exposure as investment in debenture and commercial papers of
NBFCs.
1.3

Bank Exposure to NBFCs

On a disaggregated basis NBFCs-D have a higher reliance on bank funds, which as a

percentage of total borrowings has gone up from 37% to 51% for the FY06 and FY11
respectively. For NBFCs-ND-SI it has increased marginally during the period.
Table 5 Bank Borrowings by NBFCs

NBFCs-D
Borrowings from Banks & FIs
Total Borrowings
NBFCs-ND-SI
Borrowings from Banks & FIs
Total Borrowings

FY06

FY10

FY11

FY06

Amount in Rs. Crore

FY10
FY11

8,796
23,641

31,853
64,078

35,320
69,816

37.2%
100%

49.7%
100%

50.6%
100%

53,512
245,881

99,867
549,372

148,519
686,706

29.1%
100%

25.9%
100%

29.6%
100%

Banks total exposure to NBFCs amounted to Rs.35,320 crores as advances to NBFC-D and
Rs.1,48,519 crores amounting to a total of Rs.1,83,839 crores. In addition Rs.10,750 crores was
invested by banks in debentures and CPs issued by NBFC-ND-SI.
Table 6 Bank Borrowings of NBFC-ND-SI

Bank Group
Nationalized Banks
State Bank Group
Old Private Banks
New Private Banks
Foreign Banks
TOTAL

Term
loans
74,806
8,634
4,892
23,076
6,947
1,18,356

Working
Capital Loans
14,233
5,089
1,081
6,541
1,958
28,902

As on March 2011, Amount in Rs.Crore

Debentures/
Others
Total
CPs
4,519
312
93,870
1,120
25
14,868
653
85
6,712
3,463
370
33,450
995
725
10,625
10,750
1,517
1,59,525

Capital Adequacy
Capital Adequacy
NBFCs-D
Less than 12%
2
12%-15%
3
15%-20%
8
20-30%
22
More than 30%
169
TOTAL
204

As on March 2011
NBFCs-ND-SI Total
6
8
4
7
33
41
33
55
198
367
274
478

Out of the 297 NBFCs registered as deposit taking, capital information of 204 was available
and only 2.5% of these had capital adequacy less than 15%. For NBFC-ND-SI, 3.6% had capital
adequacy less than 15% and on an overall basis only 15 out of 478 NBFCs representing 3.1%
had capital adequacy less than 15%.
2

Non Performing Assets

NBFC-D

NBFC-ND-SI

FY

Gross
NPA
% Gross
%Net
Gross
% Gross
%Net NPA
Advances
NPA
NPA
Advances
NPA
2009-10
65,978
891
1.35
#
348,517
2.8
1.2
2010-11
70,043
494
0.70
#
458,173
1.8
0.7
# negative, provision exceeds NPA
Both the gross and net NPA have shown a declining trend for the overall NBFC sector. The net
NPA for deposit taking NBFCs has been negative since FY08.
1.4

Summing up

NBFCs have registered impressive growth in the past decade. They provide valuable service to
many productive sectors of the economy for asset creation and also in conversion of physical
assets to financial assets (eg: gold loans). A large part of the growth can be attributed to
prudential norms brought in by the regulator. However, the large number of NBFCs carrying on
diverse businesses poses regulatory challenge given their growing size. Regulations have to be
suited to diverse aspects of various businesses and strengthened to increase the trust and
transparency in the sector. The Group is of a firm opinion that the registered NBFCs - both
deposit taking and non-deposit taking, play a vital role in the economy. There is, however, a
strong perception that there may be in the country a large number of unregistered and therefore
unregulated NBFCs in urban as well as rural geographies, which is difficult to be estimated. The
RBIs Report on Trends and Progress in Banking in India of 2005-06 gives an indication
pointing out that the RBI received 38,244 applications for grant of certification as an NBFC.
Therefore, the unregistered entities could be manifold the number of registered NBFCs. Further,
a total of 575 NBFCs (both deposit and non-deposit taking) accounted for 80% of the total
assets of the NBFC sector in FY10. In addition, the Residuary Non-banking Companies
8

(RNBCs) account for 66% of public deposits held by the NBFC sector. Therefore, the Group
underlines that the regulatory and supervision mechanism for the NBFC sector need to be
widened and strengthened.

***

2.

Role and Vision for the NBFC sector

2.1

Issues

The Group underlines the fact that the NBFCs have grown substantially and are rendering
valuable services to the unbanked and under-banked population of the country. Even the RBI
appointed Thorat Committee has lauded the role of NBFCs in the economic growth of the
country. NBFCs have been innovators in financial services, designing products and services
customized to the needs of the target customers. In addition they have created a suitable
operational structure to make the business models viable. They have helped expand the
financial services markets to the interiors of the country and newer products and services.
The role and vision for NBFC sector has, therefore, been looked at and analyzed from the
following viewpoints:
1. Is there an economic role that the NBFCs fulfill?
2. What is the kind of regulatory structure that can be envisaged for the sector?
3. What is the systemic risk posed by the sector and the progression curve for NBFCs?
4. Apart from the existing categories, is there any need for providing of additional
categories of NBFCs considering the economic role played by them?
Answering the above questions will crystallize the shape and direction of policy action for the
sector.
2.2

Is there an economic role that the NBFCs fulfill?

NBFCs have been operating various businesses under sound economics. Many businesses
started by the sector have later been taken up by banks and become regular banking services.
For instance, car financing, which was started by NBFCs has now become one of the larger
revenue streams for banks. The NBFCs themselves have now moved on to financing second
hand cars. Other businesses, namely, infrastructure finance, asset finance, hire purchase and,
in the recent past, microfinance have been the major areas of operations for NBFCs.
Additionally, NBFCs play a supportive role in the economy and also in financial inclusion and
therefore need to be encouraged. Some of the economic roles played by NBFCs are:
2.2.1

Infrastructure financing
While the RBI doesnt have any specific sector exposure limits, it has asked the banks to
formulate internal policies for exposure to the infrastructure sector. The banking sectors
exposure to infrastructure was Rs. 5,50,178 crore as on May 2011, which was 15% of
total non-food bank credit of the banks. In comparison, the Infrastructure Finance
10

NBFCs had an outstanding infrastructure loan book size of Rs.1,96,158 crore. Banks
further exposure to infrastructure is constrained by prudential internal limits (which
typically are 12-15%) and asset liability mismatch due to long tenure of assets and short
tenure of liabilities.
Given the projected capital requirement for infrastructure sector in the 12th five-year plan,
NBFCs will play a part in supplying capital to the sector. However, proper credit rating,
accounting and financial norms have to be ushered in for greater transparency and
soundness of the sector as also operating in the NBFC sector.
2.2.2

Serving unbanked customer segments

NBFCs have traditionally focused on customer segments which were not served by
banks like micro, small and medium enterprises (MSMEs), funding of commercial
vehicles including old vehicles, farm equipments viz. tracking, harvesters, etc. loan
against shares, funding of plant and machinery; etc.
NBFCs typically are specialized vehicles both in terms of products and the geographies
in which they operate. This specialization provides them a unique framework to assess
the risk in the undertaken business. A much closer market awareness provides them the
ability to rate borrowers, monitor them, price the relative credit suitably and effect
recoveries from them.
NBFCs also provide credit for certain sectors which are not served by banks and
Financial Institutions because Banks/FIs do not have adequate market relationships and
infrastructure for the same. Some of these sectors are:
(a)
(b)
(c)
(d)
(e)

Used Trucks
Used passenger vehicles
Consumer durable loans
Personal Loans
Funding to the Small & Medium Enterprises (SME Sector) which do not have access to
institutionalized funding, etc.

Traditionally, these sectors were financed entirely by the unorganized financiers at

exorbitant high interest rates. In the last 10 years, with their retail strength, NBFCs have
rendered significant service by extending credit to these sectors. Now banks and
financial institutions are availing of the reach and expertise of NBFCs for employing
funds in these sectors through NBFCs. This has brought in lot of funds into these
sectors, thereby reducing interest rates.
2.2.3

Strong understanding of customer segments and ability to deliver customized

products
The ability of NBFCs to produce innovative products in consonance with needs of their
clients is well recognized. This, in addition to the proximity to the clients, makes the
11

NBFCs distinct from its banking sector counterparts. In a short period of time, NBFCs
have become market leaders in most of the retail finance segments like commercial
vehicles, car financing and personal loans. In the last decade or so, the Indian retail
finance markets have seen several new products being developed and introduced by
NBFCs. The following are some cases in point - Used vehicle financing, Small ticket
personal loans (ST-PL), Three-wheeler financing, Loan against shares, Promoter
funding, Public issue financing (IPO financing) and Finance for tyres and fuel.
NBFCs have a significant economic role, especially servicing the under-banked and unbanked
populace and geographies. Bringing the diverse set of NBFCs under regulation rather than
curtailing their operations, would help orderly growth of the sector.
2.3

What kind of regulatory structure that can be envisaged for the sector?

With the substantial size of the NBFC sector it is prudent that the regulation and supervision
structure is strengthened. However, given the large numbers, the regulation and supervision is a
huge challenge. Prudential norms for stricter monitoring and reporting norms should be put in
place and, at an initial stage; it could be through data mining and analytics which could evolve
into on-site and other inspections in due course of time. Further, increased regulatory focus and
prudential framework are required for systemically important NBFCs. For smaller entities,
elaborates reporting norms is likely to a better option as it will same on time, energy, cost and
resources both to the Regulator as well as to the regulated entities. To achieve this objective,
the Regulator may also consider size-wise uniform accounting requirements and financials
reporting requirements for different sets of NBFCs.
2.4 What is the systemic risk posed by the sector and the progression curve for NBFCs?
The systemic risk posed by the sector is the inter-connect and dependence on public funds
which amounts to approximately 58% of all funding to the sector. The size of the NBFC sector is
approximately 13% of the banking sector. Once the regulatory structure and prudential norms
are put in place and the regulator is in a position to assess and manage the risks posed by the
sector, there could be an even increased interplay with the banking sector. Additionally,
development of the corporate bond market will help the NBFC sector source funds from the
capital market and be less dependent on deposits or bank borrowings and limit the risk posed to
the banking sector.
2.5 Apart from the existing categories, is there any additional category of NBFCs
required in view of the economic role played by them?
Currently, the RBI classifies NBFCs into 7 categories as following:
1. Asset finance company (AFC)
2. Investment company (IC)
3. Loan company (LC)
12

4. Infrastructure finance companies (IFC)

5. Core investment companies (CIC)
6. Infrastructure debt fund Non-banking finance company (IDF-NBFC)
7.

Non-banking finance company Micro finance institution (NBFC-MFI) - (introduced on

December 2, 2011).

The Group has observed that the NBFCs are engaged in financing physical assets and resultant
creation of a large number of jobs - which supports and strengthens economic activities across
sectors, and play a critical role as an effective instruments of credit delivery particularly in the
small and retail sectors of the economy. Therefore, the Group is of the opinion that the policies
may be geared towards the development and growth of the sector. The regulator has also been
proactive in recognizing the diverse and critical role played NBFCs and has accorded added
regulatory focus on the sector by introducing and strengthening prudential frameworks for
NBFCs. Considering the role played by NBFCs in creation of assets, financial inclusion,
generation of employment opportunities for marginalized sections of the society and their
outreach, an additional category of NBFC loan company priority sector (NBFC-LC-PS) may
be looked at for NBFCs engaged in servicing priority sector customers as defined by RBI.
2.6

Future growth and development of NBFCs

Given the important role played by NBFCs as innovators, serving unbanked and under-banked
geographies and customer segments and services not provided by banks, it is imperative that
the growth and development of the sector be accorded some degree of priority. With adequate
regulatory oversight of systemically important NBFCs, implementation of prudential norms,
regular reporting and monitoring, etc., NBFCs may be looked at playing a larger part in the
financial services sector.
***

13

3.

Recommendations of the Thorat Committee

3.1

The RBI Working Group Report

The Report of the Working Group on the "Issues and Concerns in the NBFC Sector", chaired by
Smt. Usha Thorat, was released by The Reserve Bank of India (RBI) on August 29, 2011. The
report made recommendations on strengthening the governance and supervision of NBFCs,
which are greatly appreciated especially in the following matters:

3.2

Extension of the benefits of the SARFAESI Act, 2002 to NBFCs

Extension of the benefit of tax deduction for provisions made by NBFCs

Strengthening of the Corporate governance and supervisory framework for the NBFCs

Broader objectives of RBI Working Group Report

The KAG appreciates the concerns indicated in the Thorat Committee Report arising out of
regulatory arbitrage and constraints in regulating a large number of smaller NBFCs. The KAG is
also conscious of the risks associated with a large number of un-registered / un-regulated
smaller entities, particularly because of their activities among and inter-action with the lowincome target populations. The KAG also notes that RBI views a large part of the activities of
the NBFCs as productive in nature and also views positively the role played by most of the
NBFCs including the smaller ones in meeting the funding requirements of the financially
excluded sections of the society. Therefore, KAG is of the view that addressing the regulatory
and supervisory concerns should not be abrupt, may not result in policy uncertainties, and also
not create a vacuum in the financial space for the financially excluded sections of the society.
The KAG also underlines and appreciates the aspect that, in view of diverse circumstances and
requirements of different sets of entities, RBI has been prescribing different regulatory norms for
various category of entities, such as, banks, NBFCs, target sectors, etc. For example, exposurenorms, provisioning requirements, NPA classification norms, priority sector prescriptions, etc.
are different for various categories of entities (banks / NBFCs) or sectors, etc.

3.3

Recommendations

Keeping in view all these factors and to harmonise the broader objectives of financial inclusion
viz-a-viz to gradually minimise the regulatory arbitrage, we make a few observations on some of
the recommendations of the Working Group Report, as under:
(i)

RBI recognises a large part of the activities of NBFCs as productive in nature.

However, because of increase in cost of funding, the ability of NBFCs to carry on
business may be impacted adversely. RBI may create framework and prudential
14

norms to contain the risks posed with a view to support and develop those
NBFCs which meet the needs and requirements of the productive sectors of the
economy. RBI also need to support NBFC-IFC, NBFC-MFI and NBFC-LC-PS by
facilitating bank lending to this sector by easing in securitization of assets of
these sectors, lower capital requirements, lower provisioning requirements and
by taking other appropriate regulatory measures.
(ii)

The use of public funds by NBFCs has gone down from 62% in FY06 to 58% in
FY11. During the same period, owned funds as a percent of total source of funds
increased from 23.3% to 26.1%. However, in the absence of authentic data, it
may not be possible to assess the actual usage of public funds by NBFCs for
productive and non-productive segments of the economy. The data available with
RBI may suggest / identity the NBFCs which have borrowed from Banks for
onward lending to the Priority Sector segments. Such entities should be
encouraged in larger public interest and such NBFCs should be distinguished
from other NBFCs which access bank funds for other end uses such as real
estate / capital market transactions. RBI may also consider putting in place
appropriate framework to ensure any potential mal-practices noticed in this
regard, instead of blocking flow of funds altogether, which may be detrimental to
the access of genuine priority sector borrowers to the funding through NBFCs.
Further, this also underlines the requirement of creating a comprehensive databank of NBFCs to ascertain the funding pattern vis--vis the growth in assets for
different class of NBFCs, which may provide valuable pointers and enable
meaningful decision making for regulatory framework and prescriptions required
for various types of NBFCs.

(iii)

At the time the Companies Act was last amended, it provided that an issuance to
more than 49 persons would make such issuance a public issue. However,
considering their business requirements and subject to their complying with other
requirements of a private placement as set out in Section 67 of the Companies
Act, the Government of India decided to exempt Banks, Financial Institutions and
NBFCs from this limit. This exemption to the NBFCs may be allowed to continue.

Liquidity:
(iv)

Asset Liability Management (ALM) guidelines have been made mandatory for
NBFC-ND-SIs with assets of Rs. 100 crore and above and for deposit taking
NBFCs with deposits more than Rs. 20 crore. Such NBFCs are required to
maintain a gap not exceeding 15% of their net cash outflows in the 1-30/31 day
bucket. The KAG is of the view that prescribing a separate liquidity requirement
for near-term bucket (upto 1 month) will avoidably increase the cost for NBFCs,
and consequent cost of funds for their customers. KAG therefore recommends
that for NBFCs, the tolerance limit of 15% for the negative mis-matches over one
year time buckets may be restored, which would be in line with the existing
15

prudential guidelines for both banks and NBFCs. Alternatively, the changes are
phased-out to provide adequate time to the affected entities to align with the
revised regulations.
(v)

NBFCs normally invest in money market instruments indirectly through liquid

money market Mutual Funds. Therefore, for the purpose of computing total
financial assets, investments in liquid funds of mutual fund should also be
included in the eligible liquid instruments apart from G-Sec, T-Bills etc.

(vi)

The non-deposit taking systematically important NBFCs were permitted to

augment their capital by issuing perpetual bonds, after their CRAR requirement
was increased from 12% to 15%. RBI has now prescribed similar CRAR
requirements for Deposit accepting NBFCs as well. Therefore, the same flexibility
of raising perpetual bonds may be permitted to both deposit-taking systematically
important and non-deposit taking systematically important NBFCs.

Capital Adequacy:

(vii)

The RBI Working Group has suggested that the Tier-I CRAR be raised to 12%
from the current 10%. It is evident from the report that the main consideration for
raising the Tier-I CRAR is on the basis that banks have CRR/SLR requirements
as well as priority sector obligations. But, while the banks have the burden of
CRR/SLR as well as priority sector obligations, they also have the benefit of riskweighted CRAR requirements based on the credit rating of their borrowers. For
example, for AAA rated borrower, the applicable risk weightage is 20%. After
adjusting the potential Tier-II capital, the Tier-I capital to be provided against the
AAA asset will be 1.2% of the value of the loan. The NBFCs do not have the
benefit of such calibrated risk weightage. An increase in the Tier-I CRAR would
severely impact the competitiveness of NBFCs. Therefore, KAG is of the view
that the Tier-I CRAR requirement for the NBFCs may be retained at 10%.

(viii)

From 01.04.2011, RBI had increased the CRAR requirements for NBFCs from
12% to 15%, out of which 10% should be Tier-I capital. The RBI Working Group
has recommended that Tier-1 CRAR requirement for NBFCs be raised to 12%.
This would mean another increase in Tier-I capital of NBFCs by 20%, which
would severely affect the cost side of NBFCs. RBI has prescribed a calibrated
risk-weighted regime for the banks depending upon the associated risk in lending
- both for the sectors as well as the borrowal entities. KAG is of the view that the
importance of 'risk-assessment' or 'risk-perception' as guiding principles for
determining capital requirement of NBFCs need no additional emphasis, and
would bring enhanced discipline and efficiency in their functioning. The KAG also
recommends that

16

i. the risk weightage for asset financing / financial inclusion / SME

businesses be reduced to 50%; and
ii. on Loan against property where shares are only taken as secondary
collateral (property being the main security), it doesnt tantamount to
capital market exposure, and as such risk-weight may be prescribed as
100%.

Minimum Net Owned Funds:

(ix)

RBI permits NBFCs an overall leverage by borrowing based on the prescribed

CAR. NBFCs essentially borrow only as working capital loans as they are
deployed for their business and the repayment is also funded out of the business
collections. Currently, rated AFCs are permitted to accept deposits upto 4 times
of their net-owned-funds (NOF). RBI Working Group has recommended that the
limit for acceptance of deposits for rated Asset Finance Companies (AFCs)
should be reduced from 4 times NOF to 2.5 times NOF. AFCs presently
exceeding this limit may not renew or accept fresh deposits till such time as they
reach the revised limit. The committee has recommended compulsory rating of
AFCs for raising deposits. Most of AFCs raise fund by way of NCD issuance
which are rated and if same are not secured by immovable property equivalent to
one times the issue size are considered as deposit. The aforesaid restriction will
further limit the avenue of raising money by NBFCs and thereby hamper their
contribution to economic growth by way of financing of productive assets.

Non Performing Assets (NPAs):

(x)

The period for classifying loans as NPAs in case of NBFCs is higher at 180/360
days compared to 90 days for banks. A 90 day reference for recognizing NPAs in
NBFCs in line with banks would impose provisioning burden on the NBFCs and
could result in NBFCs deciding to opt for early foreclosures, depriving their
borrowers of an income generating asset. Given the higher capital requirements,
accelerated provisioning would further burden the NBFCs. Any change in the
provisioning requirements for NBFCs to match that of Banks may be to the
detriment of NBFCs which serve specific unbanked sections of the society,
particularly the small truck operators and the SME businessmen. Their
repayment to the NBFC is linked to their collection. Invariably, their collection
gets delayed due to various reasons beyond their control. Further, the small
borrowers of NBFCs have, over the years, tuned their business model to match
the collection requirements of the NBFCs. The NBFCs have also been able to
exhibit good collection record and the default rate is extremely low. Therefore,
KAG is of the view that the current NPA classification norms for NBFCs may
continue. Instead, RBI may put in place an effective and elaborate reporting
17

mechanism to assess the delinquency pattern, behavior and incidents in various

categories of NBFCs; to design an appropriate regulatory regime.

3.3.1

GENERAL

In respect of the capital requirements; risk-weights for various classes of assets, sectors and
entities, the classification and provisioning requirements for stressed assets, borrowing-limits; or
the balance-sheet size of the NBFCs for registration / de-registration requirements, KAG is of
the view that the regulatory prescriptions should be gradual and duly phased-out so as not to
create policy uncertainties; and also afford adequate time to the affected NBFCs to be able to
align themselves with the revised regulatory framework without substantial dislocation of their
normal business activities. This will also inculcate a sense of stability among the stakeholders to
visualise and undertake long term plans.

3.3.2

Categorization of NBFCs

The RBI Working Group has recommended that since there is no difference in the regulatory
framework for loan companies (LCs) and investment companies (ICs), and since most of the
NBFCs-ND-SI are a mixture of loan and investment companies, a single category of LCs and
ICs should be made. The KAG is of the view that may not appropriately factor-in the risk profile
of LCs viz-a-viz ICs. While the assets of ICs typically carry the risk of equity / capital markets,
the asset side of LCs largely consist of loan receivables. Consequently, LCs present a far lesser
risk than ICs and therefore need to be differentially regulated from ICs. Also, the borrowings by
LCs are typically supported by credit rating by independent credit rating agencies.

***

18

4.

Recommendations - II

4.1

Prior approval of RBI for mergers of NBFCs

The RBI Working Group has recommended that all registered NBFCs should take prior approval
of the RBI whenever there is a change in control or transfer of shareholding of the said NBFC,
directly or indirectly, exceeding 25% of its paid-up share capital. Prior approval of the RBI
should also be taken for mergers of NBFCs under the Companies Act or any acquisition by / of
an NBFC governed by the SEBI Takeover Regulations.
Recommendation: The requirement of taking prior approval of the RBI whenever there is a
change in control or transfer of shareholding of an NBFC, directly or indirectly, exceeding 25%
of its paid-up share capital, should only apply in cases where the acquirer acquiring the NBFC
or the NBFC being acquired has raised public deposits. In other cases, the requirement of only
providing information to the RBI should be mandated.
Similarly, considering that the public offers under the SEBI Takeover Regulations are presently
being supervised by SEBI and mergers under the Companies Act, 1956 require prior approval
of the High Court, the need for approval from another regulatory authority viz. RBI may be
dispensed with. Further acquisitions / mergers may also require approval of the Competition
Commission of India under the Competition Act. Approvals from multiple regulatory authorities
will only delay the process. Therefore, in such cases also, the requirement of providing
information to the RBI should be mandated.
In case the proposal for prior approval from RBI for such restructuring of NBFCs is accepted, for
increased transparency, accountability and objectivity in the decision making process of the
regulatory functions of RBI, KAG also recommends that the concept of deemed approval
should also be provided in cases where the RBI does not communicate its approval / rejection
to the said restructuring within a certain prescribed reasonable period.
4.2

Definition of Public Funds

The RBI Working Group has defined public funds as funds raised either directly or indirectly
through public deposits, commercial papers, debentures, inter-corporate deposits, guarantees
and bank finance or any other debt instrument, but exclude funds raised by issue of share
capital and/ or instruments compulsorily convertible into equity shares within a period not
exceeding 10 years from the date of issue or registration with RBI.
Recommendation: KAG recommends that the term public funds should not include loans /
deposits from the Holding / Group Company, if funded through internal accruals of the Holding /
Group Company. The RBI may insist on a certificate from the statutory auditors of the Holding
Company to that effect.
19

4.3

Participative Financing:

In the backdrop of the recent concerns pertaining to levy of usurious rate of interests by Micro
Financial Institutions and earlier RBI guidelines on Fair Practice Code in 2009 (to ensure
transparency in charging high rates of interests by NBFCs), charging of high interests on loans
disbursed to retail borrowers, has always raised issues in India.
This can be mitigated if NBFCs are expressly allowed to undertake participative financing which
consist of financings in a manner that returns are linked to the actual cash flows of the venture
for which financing was availed but such that the returns are capped. Mezzanine financing is
one such form.
While per se the Reserve Bank of India Act, 1934 does not prohibit participative financing, the
circular on 2nd January 2009 on Fair Practice Code required NBFCs to, inter-alia, adopt an
interest rate model taking into account relevant factors such as, cost of funds, margin and risk
premium, etc. and determine the rate of interest to be charged for loans and advances. In our
view, while the said 2009 circular was intended to clarify RBIs earlier circular on Fair Practice
Code and ensure transparency, given the language used therein, it has been interpreted to
mean that NBFCs must follow an explicit interest based model.
We therefore urge the RBI to issue a clarificatory circular stating therein that the 2nd January
2009 circular on Fair Practice Code applies to those NBFCs that are disbursing interest based
loans and does not prohibit NBFCs from undertaking other forms of financing such as
participative financing / non-interest based financing.
As regards NBFCs that are undertaking participative financing and / or any other non-interest
based financing, the following directions should be complied with:
(i) The Fair Practice Code should set out the model on which facilities will be granted to
borrowers. The NBFCs should also set out the commercial considerations for its
facilities, (after factoring in aspects such as cost of funds, expected return and other
parameters to determine credit viability). The Fair Practice Code should be displayed on
the website of the NBFCs and updated periodically;
(ii) The borrowers should be made aware of these commercial considerations in the
agreement and the loan sanction letter. Expected returns, servicing charges should be
communicated separately. If the expected rates of return and service charges are
different for different category of borrowers, then the same should be communicated to
the borrowers.
4.4

Fixed Deposits as Financial Assets:

Presently RBI excludes fixed deposits from the definition of financial assets. Secondly, the
Report recommends that bank deposits maturing within 30 days should be taken into
20

consideration for computing financial assets. We urge the RBI to consider including fixed
deposits under financial assets for the purpose of computing principal business of an NBFC.
For this purpose, the following amendment (in bold) is proposed to the definition of principal
business stated in the circular dated 19th October 2006 on Amendment to NBFC regulations Certificate of Registration (CoR) issued under Section 45-IA of the RBI Act, 1934 Continuation
of business of NBFI -Submission of Statutory Auditors Certificate- Clarification
The company will be treated as a non-banking financial company (NBFC) if its financial assets
(including fixed deposits) are more than 50 per cent of its total assets (netted off by intangible
assets) and income from financial assets is more than 50 per cent of the gross income. Both
these tests are required to be satisfied as the determinant factor for principal business of a
company.

4.5

Bank credit for priority sector lending:

Banks lending to NBFCs who further supported the priority sector was previously allowed to be
classified by banks as priority sector. NBFCs therefore received such funding at a discounted
cost of funds. However such on lending by banks has been disallowed for NBFCs in a circular
issued by RBI on May 3, 2011.
Given the importance of the role that NBFCs play in propagating financial inclusion, i.e serving
low income families and small businesses, on lending by banks should be classified as priority
sector. This will not only enhance the growth for NBFCs but also give banks a profitable channel
to deploy funds earmarked for priority sector instead of investing the funds at a nominal return.
The NBFCs could be asked to provide evidence to the effect that the end use of the borrowed
funds was by the priority sector participants; Further banks could be assigned the responsibility
of monitoring the end use of funds.
4.6

ECB financing:

Sources of funding for NBFCs are currently limited - this hampers the growth of credit by NBFCs
and ultimately the government's objective of financial inclusion. Much like infrastructure finance
companies, NBFCs should be allowed to raise funds in the form of ECB financing In a rising
interest rate environment, this will give NBFCs the much needed fillip in terms of funding cost.
Further, the differential cost would be the difference between rupee finance and ECB financing
(post hedging). In our view this could range between 1% to 2%, and would significantly ease the
interest cost burden that NBFCs are facing. End use of the ECB should be allowed to on-lend to
the end customers.

21

4.7

Prudential norms for certain categories of NBFCs to be more relaxed

Currently, all NBFCs are treated equally with regard to prudential norms. However given their
contribution to the development of the economy, infrastructure finance companies have been
carved out as a separate category with relaxation in terms of sources of borrowings (ECB
allowed) given the long term funding needs. Certain large NBFCs that are systematically
important and have healthy asset quality, good corporate governance practices, sufficient
capital, strong parentage need to be given a separate status to enhance their growth and reach.
Secondly, these NBFCs must be differentiated from a few smaller NBFCs that have indulged in
unsecured lending leading to higher levels of non-performing assets. Therefore our
recommendation is to create a separate category of NBFCs either in terms of (i) size or in terms
of (ii) lending against a security / income generating asset ("asset financing") or (iii) a
combination of both these parameters.
The capital adequacy, provisioning, risk weight norms for these NBFCs can be more relaxed i.e
retained at the current levels.
4.8

Lending to stock brokers and merchant banks

The working group has recommended that regulations for lending to stockbrokers and merchant
bankers by NBFCs (Loan companies focused on capital market financing) should be similar to
banks. We believe that the NBFCs / Loan companies focused on capital market financing are
essentially capital market players while banks are lenders; consequently these NBFCs face
capital market risk while banks deal with lending risk. Hence we suggest that the current NBFC
regulations on the subject be retained and RBI must address the regulatory need through
reporting by NBFCs of stockbroker and merchant bank exposures.
***

22

5.

Recommendations III

5.1

DIRECT TAX ISSUES

5.1.1

Tax Deduction at Source on Interest (Section 194A of the Income Tax Act)

As per Sec 194A of the Act, the Tax Deduction at Source (TDS) @10% is required to be
deducted on the interest portion of the installment paid to the NBFC under loan / finance
agreements. However, the banking companies, LIC, UTI, public financial institution, etc.
engaged in banking business are exempted from the purview of this Section.
NBFCs carry-on the financing business mostly to retail customers, most of whom are in
unorganized sectors including a large number of individuals and SME sector borrowers. A single
point collection of tax by way of advance tax payments from NBFCs would mean greater
convenience to the Income Tax Department than collecting of tax through large number of such
customers from all over the country by way of TDS. Further, the distinction in the provision puts
NBFCs in a disadvantageous position viz-a-viz other financing entities.
Recommendation This Group, therefore, recommends that the NBFCs may also be
exempted from the provisions of section 194A of the Income Tax Act, at par with other financial
sector entities.

5.1.2

Tax benefits for Income deferral under Section 43D of the Income Tax Act

Section 43D of the Income Tax Act recognises the principle of taxing income on sticky advances
only in the year they are received. The provisions of Section 43D have been extended to the
Banks, Financial Institutions and State Financial Corporations. Further, this benefit was also
extended to the Housing Finance Companies by the Finance Act, 1999.
In accordance with the directions issued by the RBI, NBFCs follow prudential norms in line with
other financial sector entities to defer income in respect of their non-performing accounts.
However, the Income Tax authorities do not recognise these directions and tax such deferred
income on accrual basis, resulting in levying of tax on income which may not be realized at all.
Recommendation This Group, therefore, recommends that the provisions / benefits of
Section 43D of the Income Tax Act be extended to include NBFCs registered with RBI, as in the
case of other institutions.

5.1.3

Allowing of provisions made for Non-performing Assets (NPAs) under Section

36(1)(viia) of the Income Tax Act
23

NBFCs are RBI regulated entities and are required to make provisions for NPAs in
accordance with the applicable RBI guidelines concerning income recognition and provisioning
norms. The provisions of Section 36(1)(viia) of the Income tax Act allow the banks a deduction
to the extent of 7.5% from the gross total income and 10% of aggregate average rural advances
towards provisions for bad and doubtful debts made by them. Alternatively, such banks have
been given an option to claim a deduction in respect of any provision made for assets classified
by the RBI as doubtful assets or loss assets to the extent of 10% of such assets.
Recommendation Since the NBFCs are also RBI regulated entities and are required to make
provisions for NPAs as per applicable RBI guidelines, the benefits of Section 36(1)(viia) of the
Income tax Act may also be extended to the NBFCs, as available to the banks.

5.1.4

Declaration in Form 15G / 15H read with Section 206AA

Effective 1st April, 2010, a new Section 206AA has been introduced in the Income Tax Act
which require furnishing of the Permanent Account Number (PAN) issued by the Income Tax
Department mandatorily for all categories of payments. The mandatory quoting of PAN has
been extended to cover payment of interest without tax deduction even for those persons who
provide the declaration in Form 15G / 15H. The declaration in Form 15G / 15H are given by
those persons who have income below the taxable threshold limits, and therefore, may not have
a PAN number. Further, the details of depositors giving such declarations in Form 15G / 15H
are being furnished in the TDS Returns filed electronically every quarter and such declaration
forms are also submitted to the relevant authority as prescribed under the Income Tax Act. This
provision causes undue hardship to the small depositors, pensioners and senior citizens, etc.
whose income is below the taxable threshold, as they are also required to apply and obtain PAN
from the Income Tax Department.
Recommendation This Group, therefore, suggests that sub-section 2 of Section 206AA may
be removed to enable the small depositors to furnish declaration forms 15G / 15H without
mandatorily furnishing PAN.

5.1.5

Introduction of the threshold limit for TDS on the interest income on unlisted
debentures

NBFC-AFCs issue secured non-convertible debentures to retail investors (individuals) in order

to raise funds. In the case of unlisted debentures, TDS is to be deducted from the interest paid,
without any minimum threshold limit. This provision proves harsh for the individuals investing
their small savings in these secured debentures.
Recommendation This Group, therefore, suggests that clause (v) of proviso to Section 193
may be suitably amended, and the words , being debentures listed on a recognised stock
exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of
1956), and any rules made there-under, may be considered for deletion.
24

5.1.6

Depreciation in respect of Construction Equipments registered under the Motor

Vehicles Act

The Income Tax Act allows depreciation at the rate of 100% in case of certain equipment used
for pollution control, solid waste control, mineral oil concerns, mines and quarries, energy saving
devices and renewable energy devices. The Act also allows high rate of depreciation to
motorcars, buses, motor lorries and taxies used in a business of running them on hire.
Construction equipments, which contribute immensely to infrastructure development, are not
given this benefit of higher depreciation rate.
In our view, Construction equipment which are used in the infrastructure development should be
extended this benefit of higher depreciation rate.

5.2

INDIRECT TAX ISSUES

5.2.1

Extension of Cenvat credit rule to other services

In terms of Service Tax credit rules, currently 16 Services fall under Rule 6(5) of the Cenvat
Credit Rules wherein credit may be availed to the extent of 100% in connection with both
taxable and non-taxable services. The other services are covered by Rule 6(3) of the Cenvat
Credit Rules where one is able to claim credit either on a ratio of Taxable vs Non-Taxable
Services generated or by paying a pre-fixed percentage (8%) of the value of total turnover. This
sometimes results in a vague situation because the service is not a commodity where one is
able to identify unit-wise as to what exactly results in generation of Taxable and Non-Taxable
products, separately. This provision also leaves scope for subjective interpretation or misinterpretation of the provisions of law.
Recommendation The Group, therefore, recommends that application of Rule 6(5) of Cenvat
Credit may be extended to any service that results in generation of both Taxable and NonTaxable services. Further, for availing the Credit, one-to-one correlation need not be insisted
upon, as in certain cases expenses have very close nexus with the generation of Taxable
Services yet as the same are falling under Rule 6(3), and thereby the claimant has no other
option but to avail Cenvat Credit on proportionate basis. Therefore, the distinction between Rule
6(3) and Rule 6(5) may be avoided, and the input credit need to be seamless.

5.2.2

Service Tax on Hire Purchase / Lease Transactions

25

Service Tax is imposed on Hire Purchase and Finance Leasing transactions. Both these
transactions have been defined as "sale" transactions. Legally also, any transaction can either
be a "Sale" or a "Service", but can not be both. Service tax is imposed on the interest
component of Hire-Purchase / Finance-Lease transactions. In addition, VAT is also levied on
the installment amounts in most of the states. Such dual taxation on transaction of lease and
hire-purchase is impacting the profitability and sustainability of financing industry. In March
2006, abatement to the extent of 90% of the interest component was allowed. In terms of small
retail customers, who depend on lease and hire-purchase for their finance needs, taxing these
products causes undue financial hardship to them.
Recommendation The Group, therefore, recommends that the Lease and Hire-Purchase
transactions may be considered as Deemed Sale and accordingly be subjected only to VAT,
and not Service Tax.
***

26

6.

Gist of recommendation
Reference

Recommendation

Authority
concerned

Priority

3.3 (i)

Framework and prudential norms to contain

the risks and to support and develop NBFC
sector
Creating a comprehensive data-bank of
NBFCs to ascertain the funding pattern of
NBFCs
Exemption to the NBFCs under Section 67
of the Companies Act may be continued for
'private placement'.

Reserve Bank
of India

High

Reserve Bank
of India

High

Ministry of
Corporate
Affairs

High

Tolerance limit of 15% for the negative mismatches over one year time buckets may
be restored
For the purpose of computing total financial
assets, investments in liquid funds of
mutual fund should also be included in the
eligible liquid instruments apart from G-Sec,
T-Bills, etc.
Raising perpetual bonds may be permitted
to both deposit-taking systematically
important
and
non-deposit
taking
systematically important NBFCs
Tier-I CRAR requirement for the NBFCs
may be retained at 10%

Reserve Bank
of India

Medium

Reserve Bank
of India

Medium

Reserve Bank
of India

Medium

Reserve Bank
of India

High

3.3 (viii)

Prescribing a calibrated
regime for the NBFC sector

risk-weighted

Reserve Bank
of India

High

3.3 (viii)

The risk-weight for asset financing /

financial inclusion / SME businesses be
reduced to 50%
Loan against property where shares are
only taken as secondary collateral (property
being the main security), risk-weight may be
prescribed as 100%
Sub-limit for borrowing by NBFCs may be
removed

Reserve Bank
of India

Medium

Reserve Bank
of India

Medium

Reserve Bank
of India

High

3.3 (ii)

3.3 (iii)

3.3 (iv)

3.3 (v)

3.3 (vi)

3.3 (vii)

3.3 (viii)

3.3 (ix)

27

3.3 (x)

Current NPA classification

NBFCs may continue

for

Reserve Bank
of India

Medium

3.3.1

The regulatory prescriptions should be

gradual and duly phased-out so as not to
create policy uncertainties
LCs need to be differentially regulated from
ICs

Reserve Bank
of India

High

Reserve Bank
of India

Medium

Change in control or transfer of

shareholding of an NBFC - requirement of
information to the RBI should be mandated
Concept of deemed approval should also
be provided in cases where the RBI does
not communicate its approval / rejection
within a certain prescribed reasonable
period
Public funds should not include loans /
deposits from the Holding Company if
funded through internal accruals
NBFCs may be allowed to undertake
participative financing

Reserve Bank
of India

Medium

Reserve Bank
of India

High

Reserve Bank
of India

Medium

Reserve Bank
of India

Medium

RBI to consider including fixed deposits

under financial assets for the purpose of
computing principal business of an NBFC
Bank credit for NBFCs for priority sector
lending

Reserve Bank
of India

Medium

Reserve Bank
of India

High

4.6

ECB financing for NBFCs

Reserve Bank
of India

Medium

4.7

Prudential norms for certain categories of

NBFCs to be more relaxed

Reserve Bank
of India

Medium

4.8

Lending to stock brokers and merchant

banks

Reserve Bank
of India

Medium

5.1.1

Tax Deduction at Source on Interest

(Section 194A of the Income Tax Act)

Department of
Revenue

High

5.1.2

Tax benefits for Income deferral under

Section 43D of the Income Tax Act

Department of
Revenue

High

5.1.3

Allowing of provisions made for Nonperforming Assets (NPAs) under Section

Department of

High

3.3.2

4.1

4.1

4.2

4.3

4.4

4.5

norms

28

36(1)(viia) of the Income Tax Act

Revenue

5.1.4

Declaration in Form 15G / 15H read with

Section 206AA

Department of
Revenue

Medium

5.1.5

Introduction of the threshold limit for TDS

on the interest income on unlisted
debentures
Depreciation in respect of Construction
Equipments registered under the Motor
Vehicles Act
Extension of Cenvat credit rule to other
services

Department of
Revenue

Medium

Department of
Revenue

High

Department of
Revenue

Low

Service Tax on Hire Purchase / Lease

Transactions

Department of
Revenue

Medium

5.1.6

5.2.1

5.2.2

***

29

7.

Conclusion

The recommendations made in Chapter 3 and 4 of the Report are aimed at removing
the bottleneck and introducing measures and creating a prudential environment for
effective functioning of the NBFCs in the country. The Group is of the opinion that the
recommendations are critical for the growth of NBFCs; and also for achieving the
broader objectives of financial inclusion and extension of effective prudential framework
for the entire financial sector including NBFCs.
The Group appreciates the initiative of the Government and conveys its gratitude for the
opportunity given to study the NBFC sector and make recommendations for the orderly
and systematic development of the NBFC sector enabling these important entities to
contribute to the development of Indian economy. Finally, it is recommended that the
Key Advisory Group on NBFCs should function as a standing committee and meet at
regular intervals to review the progress and developments on an ongoing basis.

Sd/(M.R. Umarji)

Sd/(Ved Jain)

Sd/(N. Sivaraman)

Indian Banks Association

Indian Banks Association

ASSOCHAM

L&T Finance Holdings

Sd/(Sunil Sanghai)

Sd/(Suhan Mukerji)

Sd/(H. Jayesh Shah)

Sd/(Ashwin Parekh)

MD, HSBC

Amarchand Mangaldas

Juris Corp

Ernst & Young

Sd/-

Sd/-

Sd/(Arun Duggal)

Sd/(K. Unnikrishnan)

Sd/(R Sridhar)
MD, Sriram Transport

Sd/(Sanjeev Gupta)
Nexgen Financial
Solutions Pvt. Ltd.

(T.T. Srinivasaraghvan) (Raman Agarwal)

Chairman, FIDC
Co-Chairman, FIDC

Sd/(Dr. Rajiv Kumar)

Secretary General
FICCI

Shriram Capital Ltd.

Sd/(Dr. Shashank Saksena)

Director (DFS) and Member Secretary

Sd/-

(Alok Nigam)
Joint Secretary (BO), DFS and Chairman

30

ANNEX
IMMEDIATE
F.No.17/7/2011-BO.II
Government of India
Ministry of Finance
Department of Financial Services
IIIrd Floor, Jeevandeep Building,Parliament Street,
New Delhi, 30th September, 2011
ORDER
Subject: Constitution of a Key Advisory Group on Non Banking Finance
Companies (NBFCs).
A Key Advisory Group has been constituted under the Chairmanship of Shri
Alok Nigam, Joint Secretary (Banking Operations) in this Department to examine the
issues in NBFCs. The composition of the Group is as under
i. Shri Alok Nigam, Joint Secretary (BO) Chairman
Members
ii. S. K. Pable, DGM, DNBS, RBI.
iii. Shri K. Unnikrishnan, Dy. Chief Executive, IBA
iv. A representative each of IIM, FICCI, CII, PHDCCI and Assocham
v. Shri TT Srinivasaraghvan, Chairman, FIDC & MD, Sundram. Finance Ltd.
(Alternate representation - Shri Raman Agarwal, Co-Chairman, FIDC).

vi. Shri H Jayesh Shah, Juris Corp.

vii. Shri Ashvin Parekh, Ernst & Young.
viii. Shri Suhaan Mukerji, Amarchand Mangaldas.
ix. Shri R Sridhar, MD, Shriram Transport Finance Co. Ltd.
x. Director (BO.II&PR), DFS, New Delhi Member Secretary.
2.

The Terms of Reference of the Group is in Appendix.

3.

The Group will meet at such places and intervals, as decided by the Chairman.

(D.D. Maheshwari)
Under Secretary to the Government of India
Tel: 23748750

31

To

i.
ii.
iii.
iv.

Shri Alok Nigam, Joint Secretary (BO), DFS, New Delhi

Director (BO.II&PR), DFS, New Delhi
S. K. Pable, DGM, DNBS, RBI.
Shri K. Unnikrishnan, Dy. Chief Executive, IBA, Mumbai
v. Shri TT Srinivasaraghvan, Chairman, FIDC, New Delhi.
vi. Shri Raman Agarwal, Co-Chairman, FIDC, New Delhi.
vii. Shri H Jayesh Shah, Juris Corp., Mumbai.
viii. Shri Ashvin Parekh, Ernst & Young, Mumbai.
ix. Shri Suhaan Mukerji, Amarchand Mangaldas, New Delhi.
x. Shri R Sridhar, MD, Shriram Transport Finance Co. Ltd., Mumbai.
xi. Director, Indian Institute of Management, Ahmedabad, Gujrat.
xii. Dr. Rajiv Kumar, Secretary General, FICCI, New Delhi.
xiii. Shri Chandraji Banerjee, Director General, CII, New Delhi.
xiv.
Shri Girish Menon, Executive Officer, PHDCCI, New Delhi.
xv. Shri D.S. Rawat, Secretary General, Assocham, New Delhi
Copy for information to
1.
2.
3.
4.
5.
6.
7.

PS to FM
PS to MoS (E&FS)
PPS to Secretary (FS)
PS to AS(FS)
PSs to JS(BA) / JS (BO) / JS(IF) / JS(VPB) / JS(P&I) / JS(AB) / EA
All Directors / Deputy Secretaries / Under Secretaries
All Sections in DFS

32

8.
APPENDIX

F.No.17/7/2011-BO.II
Government of India
Ministry of Finance
Department of Financial Services

The Terms of Reference of the Key Advisory Group on NBFCs

i. Review of existing legal / regulatory / institutional framework for

NBFCs and its efficacy;

ii. Action plan including policy initiatives for orderly growth of the Sector;

iii. To recommend the legal / institutional / regulatory initiatives related

measures required for orderly growth of the Sector.
***

33