CAIIB BRBL Module A Unit 6 : Non – Banking Financial Companies (NBFCs)

CAIIB Paper 4 BRBL Module A Unit 6 : Non – Banking Financial Companies (NBFCs) (New Syllabus) 

IIBF has released the New Syllabus Exam Pattern for CAIIB Exam 2023. Following the format of the current exam, CAIIB 2023 will have now four papers. The CAIIB Paper 4 (BANKING REGULATIONS AND BUSINESS LAWS) includes an important topic called “Non – Banking Financial Companies (NBFCs)”. Every candidate who are appearing for the CAIIB Certification Examination 2023 must understand each unit included in the syllabus.

In this article, we are going to cover all the necessary details of CAIIB Paper 4 (BRBL) Module A (REGULATIONS AND COMPLIANCE) Unit 6 : Non – Banking Financial Companies (NBFCs), Aspirants must go through this article to better understand the topic, Non – Banking Financial Companies (NBFCs) and practice using our Online Mock Test Series to strengthen their knowledge of Non – Banking Financial Companies (NBFCs). Unit 6 : Non – Banking Financial Companies (NBFCs)

Non Banking Finance Companies (NBFCs)

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956.

It is engaged in the business of –

  • Loans and advances
  • Acquisition of shares/ stocks/ bonds/ debentures/ securities issued by Government or local authority
  • Leasing, hire purchase, insurance business, chit business etc.

NBFC 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.

  • The Department of Non-Banking Supervision (DNBS) of RBI is entrusted with the responsibility of regulation and supervision of NBFCs.
  • NBFC-MFIs provide access to basic financial services such as loans, savings, money transfer services, micro-insurance etc. to poor people and attempt to fill the void left between the mainstream commercial banks and money lenders.
  • NBFCs’ role in financial inclusion indicate the fact that they have been game changers in certain areas like financial inclusion especially micro finance, affordable housing, second-hand vehicle finance, gold loans and infrastructure finance.

NBFCs aid economic development in the following ways

  • Mobilization of Resources – It converts savings into investments
  • Capital Formation – Aids to increase capital stock of a company
  • Provision of Long-term Credit and specialized Credit
  • Aid in Employment Generation
  • Help in development of Financial Markets
  • Helps in Attracting Foreign Grants
  • Helps in Breaking Vicious Circle of Poverty by serving as government’s instrument.


  • In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution.
  • RBI to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with  RBI viz. Venture Capital Fund/Merchant Banking companies registered with  SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of  Section 2 of the Chit Funds Act, 1982,Housing Finance Companies regulated by National Housing Bank, or a Mutual Benefit company.

Applicable NBFCs

  • Systemically Important Non-Deposit taking Non-Banking Financial Company (NBFC-ND-SI) registered with the Bank.
  • Deposit taking Non-Banking Financial Company (NBFC-D)
  • NBFC–Factor registered with the RBI under section 3 of the Factoring Regulation Act, 2011 and having an asset size of Rs. 500 crore and above
  • Infrastructure Debt Fund – NBFC (IDF-NBFC) [Net Owned Fund of Rs. 300 crore or more and which invests only in Public Private Partnerships (PPP)

NBFC– Micro Finance Institution (NBFC-MFI) registered with the RBI and having an asset size of Rs. 500 crore and –

  • Minimum Net Owned Funds of Rs. 5 crore.
  • Not less than 75 per cent of its total assets are in the nature of “microfinance loans”.

NBFC- Infrastructure Finance Company (NBFCIFC) registered with the RBI and having an asset size of Rs. 500 crore and above and which fulfills the requirements as-

  • A minimum of 75 per cent of its total assets deployed in “infrastructure loans”;
  • Net owned funds of Rs. 300 crore or above;

Net Owned Funds and Capital Requirement

  • Reserve Bank has specified two hundred lakh rupees (Rs. two crore) as the net owned fund (NOF) required for a non-banking financial company to commence or carry on the business of non-banking financial institution, except wherever otherwise a specific requirement as to NOF is prescribed by the RBI.
  • Every applicable NBFC shall maintain a minimum capital ratio consisting of Tier I and Tier II capital which shall not be less than 15 per cent.
  • The Tier I capital in respect of applicable NBFCs at any point of time, shall not be less than 10 per cent.
  • NBFCs primarily engaged in lending against gold jewellery (such loans comprising 50 per cent or more of their financial assets) shall maintain a minimum Tier l capital of 12 per cent.

Revised Scale Based Regulatory Structure

The NBFCs have been divided into 4 layers based on their size, activity, and perceived riskiness namely

  • Base Layer
  • Middle Layer
  • Upper Layer
  • Top Layer

Base Layer (BL): The Base Layer would comprise of –

  • Non-deposit taking NBFCs below the asset size of Rs. 1000 crore and

NBFCs undertaking the following activities-

  • NBFC-Peer to Peer Lending Platform (NBFC-P2P),
  • NBFC-Account Aggregator (NBFC-AA),
  • Non-Operative Financial Holding Company (NOFHC) and
  • NBFCs not availing public funds and not having any customer interface

Middle Layer (ML): The Middle Layer would consist of

  • All deposit taking NBFCs (NBFC-Ds), irrespective of asset size
  • Non-deposit taking NBFCs with asset size of Rs. 1000 crore and above and

NBFCs undertaking the following activities

  • Standalone Primary Dealers (SPDs),
  • Infrastructure Debt Fund – Non-Banking Financial Companies (IDF-NBFCs),
  • Core Investment Companies (CICs),
  • Housing Finance Companies (HFCs) and
  • Infrastructure Finance Companies (NBFC-IFCs).

Upper Layer (UL):

  • The Upper Layer would comprise of those NBFCs which are specifically identified by the RBI as warranting enhanced regulatory requirement based on a set of parameters and scoring methodology as devised by them.

Top Layer (TL):

  • The Top Layer would ideally remain empty and may be populated if the RBI is of the opinion that there is a substantial increase in the potential systemic risk from specific NBFCs in the Upper Layer.

Regulatory Norms

Provisioning for Standard assets:

  • The RBI has w. e. f. 01-10 2022 decided that NBFCs classified as NBFC-UL shall maintain provisions in respect of ‘standard’ assets at the following rates for the funded amount outstanding:

NPA Classification:

  • The extant NPA classification norm stands changed to the overdue period of more than 90 days for all categories of NBFCs. A glide path is provided to NBFCs in Base Layer to adhere to the 90 days NPA norm as under:

Ceiling on IPO Funding:

  • There shall be a ceiling of Rs. 1 crore per borrower for financing subscription to Initial Public Offer (IPO).

Prudential Guideline

  • Concentration of credit/ investment – The extant credit concentration limits prescribed for NBFCs separately for lending and investments shall be merged into a single exposure limit of 25% for single borrower/ party and 40% for single group of borrowers/ parties.
  • An applicable NBFC may exceed the concentration of credit/investment norms, by 5 per cent for any single party and by 10 per cent for a single group of parties, if the additional exposure is on account of infrastructure loan and/ or investment.

Infrastructure Finance Companies may exceed the concentration of credit norms

(A) In lending to: 

  • Any single borrower: by ten per cent of its owned fund; and
  • Any single group of borrowers: by fifteen per cent of its owned fund;

(B) In lending to and investing in:

  • A single party: by five percent of its owned fund; and
  • A single group of parties: by ten percent of its owned fund.

Corporate Guidelines

  • Risk Management Committee – In order that the Board is able to focus on risk management, NBFCs are required to constitute a Risk Management Committee (RMC) either at the Board or executive level. The RMC would be responsible for evaluating the overall risks faced by the NBFC including liquidity risk and will report to the Board.
  • Loans to directors, senior officers and relatives of directors – NBFC-BL are required to have a Board approved policy on grant of loans to directors, senior officers and relatives of directors and to entities where directors or their relatives have major shareholding.
  • Chief Compliance Officer – In order to ensure an effective compliance culture, it is necessary to have an independent compliance function and a strong compliance risk management framework in NBFCs.
  • Core Banking Solution – NBFCs with 10 and more branches are mandated to adopt Core Banking Solution.

NBFC Activities Not Eligible for Bank Finance

  • Bills discounted/ rediscounted by NBFCs.
  • Investments of NBFCs both of current and long-term nature, in any company/entity by way of shares, debentures
  • 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 IPOs and for purchase of shares from secondary market.
  • Shares and debentures cannot be accepted as collateral securities for secured loans to NBFC.

Co-lending Model Between Banks and NBFCs

  • The banks and NBFCs shall formulate Board approved policies for entering into the Co-Lending Model (CLM) and place the Board approved policies on their websites.
  • Banks are permitted to co-lend with all registered NBFCs (including HFCs) based on a prior agreement. Co-lending banks will take their share of the individual loans on a back-to-back basis in their books.  NBFCs shall be required to retain a minimum of 20% share of the individual loans on their books.
  • Banks shall not be allowed to enter into co-lending arrangement with an NBFC belonging to the promoter Group.

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CAIIB Paper 4 Module A Unit 6-Non – Banking Financial Companies (NBFCs) (Ambitious_Baba)

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