The new restrictions on lending stipulate that unless sanctioned by the board, middle and upper layer NBFCs should not lend more than Rs 5 crore to directors, the CEO or relatives of directors. They also cannot lend to a company in which one of their administrators or their relatives is interested as a partner, director, employee or guarantor. The restrictions also apply to any company in which one of their directors or relatives is interested as a majority shareholder, director, officer, employee or guarantor.
Under RBI ladder-based regulations, upper layer 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 layer, and the smaller ones form the base layer. if they have common administrators. The RBI has tightened standards for NBFCs following the failures of IL&FS and DHFL. The stricter standards prompted HDFC to consider merging with HDFC Bank. It may also encourage other large lenders to turn to the banking sector.
The RBI has also tightened standards for basic NBFCs. These companies are required to mention in their annual report the loans granted to entities in which the directors or their relatives hold significant interests. In addition, these loans can only be advanced after they have been approved by the board. The move will help lenders control misappropriation of funds using the group’s NBFCs.
The central bank has imposed restrictions on lending to the real estate sector. New standards require that loans can be made after borrowers have obtained prior approval from the government or other statutory authorities for the project.
While the stricter lending standards apply to upper and mid-tier financial companies, the new disclosure directive applies to all financial companies and comes into effect from the current financial year. Under the new corporate governance standards, even non-listed NBFCs are encouraged to make full disclosure in accordance with Sebi’s share listing and disclosure standards.
NBFC’s 2022-23 balance sheet will contain their exposure to commercial real estate, residential mortgages and mortgage collateral investments. They will also have to report equity investments, including advances made for any purpose where the security is capital. All intra-group exposures must be disclosed on the balance sheets.
“After being identified as an NBFC-UL (top layer), unlisted NBFC-ULs must establish a board-approved roadmap to comply with the disclosure requirements of a listed company under the Securities and Exchange Board of India (Registration and Disclosure Requirements) Regulations, 2015,” the RBI said.
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