RBI Mandates Rs 20,000 Cash Disbursal Cap For NBFCs: Compliance Urged

The Reserve Bank of India (RBI) has issued a directive to selected non-bank financial companies (NBFCs), urging strict adherence to income tax rules governing cash disbursal. This move comes on the heels of recent actions against IIFL Finance's gold loan business for violating such norms, among others, according to News agency reports.

In line with the provisions outlined in Section 269SS of the Income Tax Act, 1961, individuals are prohibited from receiving loan amounts exceeding Rs 20,000 in cash. The advisory emphasises that NBFCs should not disburse loan amounts exceeding this cash limit.

This advisory follows regulatory action taken against IIFL Finance, which was found to have breached several rules, including those concerning the disbursal and collection of loans exceeding the statutory limit for cash transactions.

The Master Directions for NBFCs, tailored to different scales of operations, clearly delineate compliance requirements under Sections 269SS and 269T of the Income Tax Act, 1981. These sections pertain to regulations governing the acceptance and repayment of loans and deposits, respectively.

The RBI's proactive measures aim to ensure strict adherence to tax regulations surrounding cash disbursals and repayments, in line with the directives outlined in the scale-based regulation framework for NBFCs.

Although the regulator has not indicated immediate punitive measures for non-compliance, the advisory serves as a warning to lenders deviating from these prescribed rules.

On March 4, the RBI imposed business restrictions on IIFL Finance, one of the largest gold-loan NBFCs, citing significant cash disbursals and collections exceeding statutory limits, among other concerns.

"The RBI has issued a draft harmonised prudential framework for lenders who undertake project finance. It is proposing to (1) tighten certain lending criteria, which should improve the project viability in our view, and (2) increase standard asset provisioning to 1-5% of loans from the current 0.4% in a phased manner," IIFL said in a report.

In response to queries regarding the enforcement of the Rs 20,000 cash disbursal limit, the RBI reiterated its commitment to enforcing compliance with regulatory directives, underscoring the need for corrective actions to address any identified shortcomings.

Amidst regulatory scrutiny, IIFL Finance faces liquidity challenges as banks adopt a cautious stance on extending credit lines to the NBFC. This cautionary approach follows the RBI's clampdown on the non-bank lender's gold loan business, resulting in a reduction in new credit lines and disbursements from existing sanctioned limits.

"We estimate additional provisioning requirement to be 0.5-3% of banks' networth and hurt CET1 ratio by 7-30bps.For infra-NBFCs ala REC, PFC, IREDA, it should have no RoE impact, but can impact their Tier1 ratio by 200-300bps, and also potentially weigh on their valuation multiples, IIFL said.

The impact of these curbs on IIFL Finance's overall business is estimated to be approximately Rs 500 crore ($60 million), with banks refraining from extending lending facilities to its gold and other business segments.

Consequently, IIFL Finance has canceled a proposed $400 million bond fundraising plan, with its top shareholder, Fairfax India, stepping in to provide liquidity support of up to $200 million to mitigate liquidity concerns.

IIFL Finance has raised Rs 500 crore through bonds and is exploring a rights issue of shares to raise an additional Rs 1,272 crore. The company, which employs around 40,000 individuals, with 15,000 engaged in the gold loan business, is actively seeking avenues to address liquidity challenges and regain investor confidence.

In light of the evolving regulatory landscape and liquidity constraints faced by NBFCs, market participants are closely monitoring developments within the sector, as regulatory compliance and liquidity management assume greater significance in sustaining business operations and investor confidence.