Rules for NBFC microfinance companies change

The Reserve Bank of India (RBI) created a new category of non-banking financial company (NBFC) known as non-banking financial company-micro finance institution (NBFC-MFI) through a circular on 2 December 2011 (circular 1). After receiving complaints about compliance difficulties from some NBFCs primarily interested in microfinancing, the RBI issued a new circular on 3 August (circular 2), modifying some of the requirements.

Circular 2 states that all registered NBFCs intending to convert to NBFC-MFIs must seek registration by 31 October 2012 subject to the condition that they maintain net-owned funds (NOF) of ₹30 million (US$500,000) by 31 March 2013 and ₹50 million by 31 March 2014 (or, for NBFCs operating in northeastern India, ₹10 million by 31 March 2012 and ₹20 million by 31 March 2014). If they are unable to meet these requirements, they must ensure that any lending to the microfinance sector i.e. individuals, self-help groups (SHGs) or joint liability groups (JLGs) which qualify for loans from MFIs is restricted to 10% of their total assets.

Existing NBFCs intending to be registered as NBFC-MFIs must register immediately with the regional office in the jurisdiction in which their registered office is located. They must present an original certificate of registration (CoR) issued by a bank in order to change their classification to NBFC-MFI.

The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.