RBI Regulations and Criteria for NBFCs to Become Banks

Procedure of NBFC to become a Bank

• Application
  • The NBFC files an application with the RBI Regional Office.
• Review
  • The RBI reviews the promoters senior management and CIBIL record of the NBFC.
  • License After due scrutiny the RBI issues the NBFC license
• Reporting
  • Submits financial and prudential reports on a regular basis to the RBI.

Role of RBI in NBFC Regulation

• Registers and grants licenses to NBFCs.
• Sets policies and issues directions to NBFCs.
• Inspects and supervises NBFCs.
• Ensures compliance and exercises surveillance over the activities of NBFCs.
• It has the powers to penalize NBFCs in case of breach of the RBI Act.

Conversion Criteria of NBFC into Banks

• Financial Activity
  • Over 50% of total assets must be financial in nature.
• Income from Financial Assets
  • More than 50% of gross income must come from financial assets.
• Reserve Fund
  • NBFCs should add at least 20% of the net profit every year to the reserve fund.
• Regulatory Compliance
  • Includes membership with Credit Information Companies (CICs) registration with FIU-IND and CKYC CERSAI.
• Antimoney Laundering (AML) and Counter Financing of Terrorism (CFT)
  • The NBFC should receive training in the AML/CFT protocols.
• Risk Management
  • There must be a board approved risk management policy in place.
  • The RBI assumes a vital role in the administration and regulation of NBFCs.

Other Requirements 

• The NBFC must have a minimum capital adequacy ratio of 10%.
• The NBFC must have net NPAs of no more than 5%.
• The NBFC must have a lock-in period of at least five years.
• The NBFC must not default on public deposits.
• The NBFC must open 25% of its branches in rural and semi-urban areas.
• The NBFC must meet a priority sector lending target of 40% of net bank credit.