RBI bars NBFCs from giving loans to directors

The Reserve Bank of India has stepped in to stop diversion of funds by finance companies. In a bid to check the conflict of interest in the lending operations of non-banking finance companies

The Reserve Bank of India (RBI) has stepped in to stop diversion of funds by finance companies. In a bid to check the conflict of interest in the lending operations of non-banking finance companies (NBFCs), the RBI has barred NBFCs from granting any loan or non-fund based facility or any other financial facility to directors and their relatives. The RBI move follows reports that promoters and business groups were using NBFCs to divert funds for other purposes.

In a circular issued on Tuesday, the RBI has said NBFCs should not extend loans to any firm in which any of their directors is interested as partner, manager, employee or guarantor. It has also barred NBFC loans to any company of which — or the subsidiary or the holding company of 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;

It has also barred loans to 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 any further,” the RBI said.

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NBFCs are required to submit information pertaining to loans and advances granted to their directors, relatives and other entities for each quarter end within 15 days from the close of the respective quarter. According to the RBI, in cases where the NBFC has already provided credit facilities to its directors, immediate steps should be initiated to recover the amounts of the loan or advance together with interest as soon as the loan or advance falls due for repayment in terms of the loan agreement. “In case there is no repayment date fixed for any facility, the same may be recovered within a period of one year from the date of the circular,” the RBI said.

The RBI has also tightened the corporate governance norms for NBFCs. An NBFC with assets of Rs 50 crore or above is already required to form an audit panel of not less than three members of its board of directors.

Now it has asked NBFCs with a deposit size of Rs 20 crore to form audit committees. “Further, in view of the interest evinced by various entities in this segment, it would be desirable that NBFCs with a deposit size of Rs 20 crore and above and non-deposit taking NBFCs may form a nomination committee to ensure ‘fit and proper’ status of proposed/existing directors,” the RBI said. To manage the integrated risk, a risk management panel should be formed, in addition to the asset liability management committee (ALCO) constituted to monitor the asset liability gap and strategise action to mitigate the associated risk , it said.