What changed
RBI created a separate NBFC category called NBFC-MFI, based on the Malegam Committee recommendations. It set minimum net owned funds at Rs. 5 crore (Rs. 2 crore for North Eastern Region for registration) and mandated that at least 85% of net assets (defined as total assets other than cash, bank balances, and money market instruments) be qualifying assets. Existing assets as of January 1, 2012 are grandfathered and can run off on maturity but cannot be renewed. Existing NBFCs have a phased timeline: Rs. 3 crore by March 31, 2013 and Rs. 5 crore by March 31, 2014.
What it means for you
NBFCs focusing on microfinance must now meet stricter eligibility criteria to be classified as NBFC-MFIs, including higher capital and asset quality thresholds. This formalizes regulatory oversight for the microfinance sector, ensuring only well-capitalized entities with a microfinance focus operate. Banks lending to or investing in NBFC-MFIs should reassess counterparty risk based on these new norms.
What you must do
- Verify if your NBFC qualifies as an NBFC-MFI under the new definition, including net owned funds (with phased timeline for existing NBFCs) and qualifying asset ratio (net assets excluding cash, bank balances, and money market instruments).
- Ensure statutory auditor's certificate is obtained to confirm compliance with the new category requirements.
- Monitor compliance with the 85% qualifying assets threshold, noting the grandfathering provision for assets as of Jan 1, 2012 (which can run off on maturity but cannot be renewed).
- Prepare for potential self-regulatory organization (SRO) guidelines expected from industry associations (separate guidelines to follow).
Who it affects
All NBFCs (excluding RNBCs) engaged in microfinance, Existing NBFCs seeking reclassification as NBFC-MFIs, Statutory auditors of NBFCs, Industry associations involved in monitoring compliance
What is the minimum net owned funds requirement for an NBFC-MFI?
The minimum net owned funds is Rs. 5 crore, but for NBFC-MFIs registered in the North Eastern Region, it is Rs. 2 crore. Existing NBFCs have a phased timeline: Rs. 3 crore by March 31, 2013 and Rs. 5 crore by March 31, 2014.
What qualifies as a 'qualifying asset' for NBFC-MFIs?
At least 85% of net assets (total assets other than cash, bank balances, and money market instruments) must be in the nature of 'qualifying assets' as defined by RBI. Assets originated on or after January 1, 2012 must meet this criteria, while existing assets as of that date are grandfathered and can run off on maturity but cannot be renewed.
When did these directions come into effect?
The directions came into effect from December 2, 2011, as per the Non-Banking Financial Company -Micro Finance Institutions (Reserve Bank) Directions, 2011, updated in this master circular of July 1, 2013.