The Hindu Business Line : RBI fiat to NBFCs on loans to directors

Mumbai May 8 The Reserve Bank of India has asked non-banking financial institutions (NBFCs) not to grant any loan, or non-fund based facility to its directors, their relatives or to any firm in which any of its directors have interest to obviate conflict of interest in lending operations.

This forms part of the corporate governance guidelines issued by the RBI to NBFCs on Tuesday.

As per guidelines, the NBFCs should not grant loan, advance or non-fund based facility or any other financial accommodation/facility to its directors or their relatives; to any firm in which any of its directors is interested as partner, manager, employee or guarantor; any individual in respect of whom any of its directors is a guarantor; any company or subsidiary or the holding company in which, any of the directors of the NBFC is a director, managing agent, manager, employee or guarantor or any firm in which he holds substantial interest; any entity, whether incorporated or not which uses as a part of its name or in connection with its business, the name of the NBFC or any such word as would show its association with the NBFC.

Any existing arrangements may be allowed to continue up to the date when they are due. They should, however, not be renewed or extended.

NBFCs are required to submit information pertaining to loans and advances granted to their directors, relatives and other entities for each quarter end to the RBI within 15 days from the close of the respective quarter.

Loan recovery

In cases where the NBFC has already provided credit facilities to its directors, immediate steps should be initiated to recover the amount with interest, if any, as soon as the loan or advance falls due for repayment. In case there is no repayment date fixed, the same may be recovered within one year from the date of this circular.

It suggested the following guidelines for consideration of the Board of Directors of NBFCs:

Audit Committee

NBFC having assets of Rs 50 crore and above as per its last audited balance sheet is already required to constitute an Audit Committee, consisting of not less than three members of its Board of Directors, the instructions shall remain valid. In addition, NBFC-D with deposit size of Rs 20 crore may also consider constituting an Audit Committee on similar lines.

Nomination Committee

It was desirable that NBFC-D with deposit size of Rs 20 crore and above, and NBFC-ND-SI may form a nomination committee to ensure `fit and proper' status of proposed/existing directors.

The market risk for NBFCs with public deposit of Rs 20 crore and above or having an asset size of Rs 100 crore or above as on the date of last audited balance sheet is addressed by the Asset Liability Management Committee (ALCO) constituted to monitor the asset liability gap and strategise action to mitigate the risk. To manage the integrated risk, a risk management committee may be formed, in addition to the ALCO in case of the above category of NBFCs.

It has proposed that the NBFCs should furnish information to the Board of Directors at regular intervals on the progress made in putting in place a progressive risk management system, and risk management policy and strategy followed.

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