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.
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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.
