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Operational Manual of the NBFCs: A Complete Guide

Operational Manual of the NBFCs
Karan Singh
| Updated: Mar 24, 2021 | Category: NBFC, RBI Advisory

NBFCs or Non-Banking Financial Companies make their path to the financial market many years back, and still, they are playing a praiseworthy role in serving the lower sections of society in India. Unlike regular banks, NBFC is easy to access and facilitate profitable financial services to the low-income group or lower society. Apart from this, The Non-Banking Financial Company also deals with various businesses in India, such as insurance, hire or purchase, and buying Government securities. Scroll down to check more information regarding the Operational Manual of the NBFCs.

What is an NBFC?

Before moving into the operational manual of the NBFCs, let us first understand the meaning of NBFC. NBFC or Non-Banking Financial Company is a financial company registered under the Companies Act, 1956 and 2013, which provides various financial services such as advances, loans, acquisition of debentures or shares or securities of bonds issued by the Government of India or any local authority. RBI or Reserve Bank of India governs all NBFCs in India.

Following is the list of all the areas of operations in NBFCs:

  • Insurance Business.
  • Lease Agreement.
  • Debentures.
  • Bonds.
  • Stock Trading.
  • Chit Fund.
  • Preference and Equity Shares.

Following are the areas that NBFCs don’t serve:

  • Industrial.
  • Trading of Tangible Goods.
  • Agriculture.
  • Real Estate Activities.

Credit and Operation Policy (Operational Manual of the NBFCs)

As we know that all NBFCs or Non-Banking Financial Companies are governed by RBI (Reserve Bank of India). So, for smooth and easy operations, these companies must fulfil some operation and credit policies as mentioned by the Central Bank or the Reserve Bank of India.

Following are vital elements of NBFC Operational and Credit Policy under the Operational Manual of NBFCs:

  • Customer KYC Policy: The Reserve Bank of India guides all financial organizations to operate as per the prescribed procedure of KYC (Know Your Customer). KYC is the most vital to supervise any doubtful transaction and to report it to the applicable authority. The main objective of KYC procedures is to protect the Non-Banking Financial Companies and banks from being cheated by deceitful borrowers involved in money laundering activities. Moreover, the aim of KYC is to enable banks to know their borrowers’ requirements and their financial dealing in a proper way. This will help them to handle their risks more fluently.

Therefore, all the Non-Banking Financial Companies are required to frame their Customer KYC Policy with respect to the following vital elements:

  1. Process of Customer Identification;
  2. Customer Acceptance Policy;
  3. Monitoring of Transactions;
  4. Financial Risk Management.
  • Anti-Money Laundering: It is clear that fair and transparent transactions are crucial not only for the rapid growth of the industry but also for the authority and honesty of the country. In the outlook of the above, the DBOD or Department of Banking Operations and Development and the Reserve Bank of India had set some guidelines to all the financial organizations under the FATF (Financial Action Task Force) observation. The FATF recommendation on Anti-Money Laundering and Terror-Funding standards has now become a benchmark for outlining Anti-Money Laundering and Anti-Terror Funding policies by the monitoring authorities. Compliances with these benchmarks by Non-Banking Financial Companies and regular banks is vital for an international financial relationship. There are certain important guidelines by the Reserve Bank of India for the Non-Banking Financial Companies to draft operational guidelines for AML (Anti-Money Laundering) and KYC procedures. You can check the same below:
  • Customer Acceptance Policy: The acceptance policy of the customer is an authoritative part of the operational manual of the NBFCs. Non-Banking Financial Companies should plandetailed and clears guidelines concerning the customer’s acceptance. The policy must enclose a definite direction about the given aspects:
  1. Banks should avoid opening an account on Benami or false name.
  2. Customer’s classification on the basis of risks and other factors such as payment mode, location, business activity, annual turnover, etc.
  3. Other info and documentation in accordance with the guidelines of the Reserve Bank of India and PML Act, 2002must be issued from time to time.
  4. Needed checks before opening a new bank account.
  5. In case if a customer is allowed to act on behalf of another company or person, it should be clearly spelt out.
  6. Bank cannot close or open the account in the event of insubordination of the customers.

Procedure for Customer Identification – Operational Manual of the NBFCs

Identification of a customer specifies examining a customer, and its credibility depends on the documents and information. Hereafter, NBFCs are required to collect satisfactory and genuine information for every new customer. During the identification of the customer, consider the following factors:

  • Get aware of the right structure and ownership of a new customer.
  • Check that the individual, if approved by the related source to act on behalf of another individual or entity.
  • Authenticate the related documents to know the legal status of the company or a person.
  • Determine the entitlement structure and the ownership of a new customer.
  • Non-Banking Financial Company must check the individual who is in authority or act as a legitimate person on behalf of another person.

Examining the Financial Transaction – KYC Structure

Examining the transactions is certainly an authoritative part of a KYC structure. The Non-Banking Financial Companies can capably overcome and control their risk factor by determining the financial activity of new customers.

  • Non-Banking Financial Companies should properly arrange all transaction records with extreme diligence and care in the vision of u/s 12 of the PML Act, 2002.
  • Moreover, it is crucial to ensure that weak or unclear records are reported quickly to the related authority.
  • Non-Banking Financial Companies must take suitable measures to ease thought.
  • Non-Banking Financial Companies must placea system for searching the risk classification of the account.

Risk Management

Entities arrange risk management with a purpose to ease the immediate and difficult threat. In order to overcome intricacies, the Non-Banking Financial Company must execute an effective KYV program that consolidates effective procedures for eliminating the risk. Here are some vital features of the KYC program, which should contain tasks assignment, proper management flaws, training, etc.

  • The members of the business must pass a risk management policy as soon as they availed the NBFC Registration.
  • An active training program must be in place to train the employee and aware employees regarding KYC measures.
  • A unique training segments for the back-end and front-end compliance employees.
  • Non-Banking Financial Company must prepare a risk profile of their current and new customers by taking Anti-Money Laundering (AML) measures into account to alleviate the risk of the transaction.

Pre-Settlement Policy

It is stated the early payment of the loan, and in this policy, borrowers can pay all their dues regarding the loan before the end of the loan tenure. The banks and NBFCs are accountable for layout policy concerning the same so that customers can pre-settle their loans without any difficulties. Following are some T&C (Terms and Conditions) of this policy:

  • Simplify whether the prepayment is permitted or not;
  • Mention whether pre-settlement of loans allows next loan cycle or not;
  • Also mention the penalties provision regarding prepayment, if any;
  • Mention rebate for this policy, if any.

Categorization of Asset – Operational Manual of the NBFCs

It should be remembered that loans are a respected asset for banks and Non-Banking Financial Companies. It is imperious for the banks to categorize the borrowers into values and Non-Performing Assets (NPA).SMA or Special Mention Accounts is defined as the loan asset on which the interest and standards are overdue for 90 days or 3 months.

Recognition of income by the NBFCs will be done based on the accounting standards drafted by ICAI.

  • Income that combinesinterest and any other charges pursuant to Non-Performing Assets (NPA) will be known only when understood.
  • The income produced from Non-Performing Assets (NPA) will be known on a cash basis.

Loan Write Off Policy

When the NPA loan manages to spend time in debts, in that case, it can be written off. The Reserve Bank of India has enlisted some procedures in the purview of the above.

Following is the table signifying exhibits the same:

Types of Loan Assets Guidelines of RBI
Loan Asset 100% of Outstanding
Standard Asset 1% of Outstanding
Sub-Standard Asset 50% of Outstanding

It is proof that the Non-Banking Financial Companies need to draft an effective accounting policy concerning a loan to write off. This policy is proficient in eradicating Non-Performing Assets loans from the account; however, it diminishes the credibility of the portfolio; while pointlessly overstate the quality of a portfolio. Hence, while inspecting the portfolio’s quality, the analyst must review the bad debt’s level.

Restructuring of Loans

Non-Banking Financial Companies can also restructure the terms of the current loan agreement as per the policy structure issued by their BODs or Board of Directors. But this may be finished in the following cases:

  • Before the beginning of business;
  • After the beginning of the business, but before the asset has been categorized as sub-standard;
  • After origination of business, but after the asset has been categorized as sub-standard;
  • In each of the above three cases, the restructuring of principal or interest could be completed, with or without loss.

Restricted Loans

As per the regulations of RBI or the Reserve Bank of India, Non-Banking Financial Companies (NBFCs) and MFIs (Micro Finance Institutions) cannot approve a loan to the following customers or applicant;

  • Loans to political parties, political candidates, or other political institutions;
  • Loans to gambling companies;
  • Loans to substitute or bailout the lender who wants to withdraw;
  • Loans for arming or weapon activities;
  • Loans for alcohol and drugs-related activities.

Conclusion

That’s all about the operational manual of the NBFCs. Non-Banking Financial Companies (NBFCs) and MFIs (Micro Finance Institutions) playing an essential role in alleviating the instability that exists in the economic structure of the nation. Non-Banking Financial Companies are still developing and in search of easy-going guidelines or regulations from the governing authorities to carry out their operations more actively. We hope this discussion has wired your understanding of the operational manual of the NBFCs.

Also, Read: GST Applicability on NBFCs: A Complete Overview

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Karan Singh

A legal writing enthusiast, a wanderer, and a zealous reader. After gaining a lot of knowledge about the diverse legal topics and developing research skills, Karan joined the league of legal content writers to deliver quality-rich blogs.

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