A Complete Overview of Regulations for NBFCs

A Non- Banking Financial Company (NBFC) is a financial institution engaged in the business of loans and advances, acquisition of stocks, shares, debentures, bonds, securities issued by the government or local authority or other marketable securities of like nature but does not involve any institution whose principle business is of purchase or sale of goods, industrial activity, agricultural activity, providing any services and purchase, construction or sale of immovable property. The registration of NBFC must be done in accordance with the rules and regulations given under Section 45-IA of the RBI Act 1934^[1] and is duly registered under the Companies Act, 2013. This article will give a complete overview of regulations for NBFCs in India.

The Reserve Bank of India (RBI) regulates the registration and functioning of NBFC. NBFC provides banking and non-banking financial services to the people and do not hold a banking license. However, it is necessary for NBFCs to follow all the rules and regulations laid down by the Reserve Bank of India. The agenda of NBFCs is to raise capital funds from the public depositors and investors and further lend to the borrowers.

Benefits of NBFCs in India

Some of the benefits of NBFCs in India are: –

• It ensures economic growth.
• Provides easy credit to the needy ones.
• Quick disbursement of the loan at a lower rate of interest.
• Provide financial assistance to corporate.
• Trade in money market instruments.
• The registration of NBFC is easier as compared to the bank license.
• The loan processing facility under NBFC is much approachable and faster as compared to most of the banks. Since the banks are more stringent in terms of providing loans, it involves long paperwork along with strict requirements and eligibility. NBFCs provide hassle-free services to the customers.
• NBFCs are essential for the development and growth of the commercial, industrial, institutional and service sectors. Therefore, an active interest is taken by the government in the functioning of the NBFCs, encouraging improving its regulations and facilities.
• The official procedures and paperwork is comparatively less with NBFCs as compared to banks. Therefore, Regulations for NBFCs are more convenient options for consumers rather than other financial institutions.
• NBFCs serve all businesses be it big or small.

Regulations for NBFCs in India

While several financial services are provided by NBFCs to the people, yet some discrepancies have been identified in its functioning. All NBFCs work in accordance to the rules and regulations of RBI and upon the amendment of RBI act in 1997; all NBFCs with net owned funds of Rs 2 crore and above have to take statutory approval from RBI. The regulations for NBFCs in India are as follows: –

• A minimum of 2 crore Net Owned Funds (NOF) is required to be maintained by the companies who are willing to register NBFC in India.
• The 10 percent of the deposits of the NBFCs are maintained as liquid assets.
• No deposits which are repayable on demand are to be accepted by the NBFCs.
• NBFCs are not allowed to take the rate of interest higher than the ceiling rate as specified by the reserve bank of India.
• NBFCs are not allowed to offer additional benefits or gifts to the depositors.
• No assurance to the repayment of deposit made by the NBFC is provided by the RBI.
• Regulations for NBFCs are required to build a lot of funds and transfer up to extend of 20 percent of their net deposit and not less than that.
• The RBI rules its functionalities in regards to the issues of prudential norms investments, disclosures, credits and etc.
• The depositors of NBFCs are eligible to avail nomination facility.
• The unincorporated NBFCs are not eligible to accept deposits from public.
• A minimum capital adequacy norm of 8 percent has to be maintained by NBFCs.
• A minimum credit rate has to be availed by the NBFCs from the credit rating agencies.
• In order to address the short term liabilities, the NBFCs are bound to maintain the threshold of liquidity buffers related to the liquid asset. This would help them to prevent the liquidity crises with less hassle.
• Under the RBI Act 1934, the Reserve Bank of India has a right to issue directions, to register, inspect, lay down policies and conduct scrutiny over the NBFCs.
• For any infringement of the compliances of RBI Act or directions issued by the RBI under the act by the NBFCs, the Reserve Bank of India has the power and authority to penalize them.
• The penal action can result to the cancellation of the certificate of registration by the RBI which was granted to the NBFC.
• The NBFCs cannot engage into the business without the prior approval from the Reserve Bank of India. Failing to this provision can lead to endanger in the existence of the concerned entities as IRB can enforce severe penalties upon them.
• An NBFC is entitled to constitute an audit committee whose asset value is of Rs 50 crore or more and this shall be done in accordance with the last audited balance sheet. At least three members from the Board of Directors must be there during the formation of such committee.
• It is necessary for the NBFCs to prepare their balance sheet along with the profit and loss account on 31^st March of every year.
• The Board of Directors of the every NBFC who are willing to confer call loans have to frame policy for the same in the very first place.
• It is necessary for every NBFC to prepare Suspicious Transaction Report (STR) in circumstances where there are reasons to believe that the specific transaction adheres to the criminal activity regardless of the amount of transaction.

Liquidity Coverage Ratio in regard to NBFC

The Liquidity Coverage Ratio (LCR) is the proportion of liquid assets which the NBFCs hold to address the short term liabilities. Certain conditions are also laid down by the RBI for deposit-taking and non-deposit taking NBFCs regarding the liquidity coverage ratio which has come into effect from December 2020. The conditions are as follows: –

• Where the asset size of non- deposit-taking NBFCs falls within Rs 5,000 crore to Rs 10,000 crore then, in such a case, it is necessary for the NBFCS to maintain 30% of the liquid assets as liquid coverage ratio.
• The Reserve Bank of India required the deposit-taking NBFCs to maintain a certain level of liquidity as a buffer asset to prevent or curb the liquidity crisis.

Why is performing of financial services allowed to NBFC by RBI and other Regulatory Authorities?

• The Non- Banking Financial Companies (NBFC) contributes towards the growth of the various sectors like transport and infrastructure.
• The NBFCs can help to provide employment opportunities to the people across India.
• NBFCs can help in the development of the economy.
• Easy financial credit can be rendered by NBFC to the economically weaker sections of the society by helping them.

What are the powers of RBI over NBFCs?

• Since the Reserve Bank of India ha powers and authority given to them under the RBI Act, 1934, it has powers to lay down policies and rules, to register, regulate, inspect, exercise and supervise surveillance and issue directions to NBFCs.
• The Reserve Bank of India has the power to penalize the NBFCs for violating and breaching the provisions of the RBI Act or the orders or directions issued by the RBI under the RBI Act.
• Such penal action taken by the RBI can result in the cancellation of the Certificate of Registration issued to the NBFC, or prohibiting and not allowing the NBFCs to accept deposits etc.
• It is unlawful and illegal for any financial entity to make a false claim that it is regulated by the RBI so as to mislead the public and collect deposits from them. Under such a scenario, such financial entities shall be liable for the penal action under the India Penal Code.

The Registration process under the NBFC Regulations

In order to register for NBFC license the following procedure has to be followed: –

•  Acquire DIN and DSC for the Directors.
• To meet the RBI provisions, an affidavit from all the directors.
• Draft a Memorandum of Association (MOA) and Article of Association (AOA)
• Further the incorporation form is to be filed along with all the necessary documents.
• Certificate of Registration is to be obtained from the Registrar of Companies (ROC).
• Net Owned Funds (NOF) to be deposited in the company’s bank account.
• The next step is to apply for the registration with RBI.
• The applicant is required to file an application online with the Reserve Bank of India (RBI).
• Once the application is submitted successfully, a reference number will be generated to facilitate the inquiry in the future.
• Further, all the hard copies of all the submitted document have to be sent and the application the RBI regional office.
• The accuracy of the documents shall be checked by the regional office.
• The application shall be forwarded to the head office.
• Online NBFC license in India shall be granted by the head office of the RBI only if the requirements under section 45-IA of the Act is fulfilled by the company.
• The NBFC business must be commenced within 6 months from the date of the Certificate of Registration (CoR).

Post Incorporation Compliances under NBFC Regulation

• The NBFC is required to become a member of all CICs once it has obtained COR.  
• To register under Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI).
• To register with the Financial Intelligence Unit- India (FIU- IND).
• To register with Central KYC.
• To adopt Fair Practice Code.
• To submit financial information to the information utilities.
• To adopt IT Policy and Anti Money laundering Policy.
• To file a timely return with RBI.
• To convene statutory meetings.
• To maintain the accounts.
• To file income tax return.
• To file GST return.
• MCA Compliances.

Regulations for NBFCs and Public Deposits

The public deposits are not allowed to be accepted by all NBFCs. Only those NBFCs who have specific authorization from the Reserve Bank of India (RBI) and have an investment-grade rating, are permitted to hold or accept public deposits up to a maximum of 1.5 times of its Net Owned Funds (NOF). The NBFC regulations in detail are: –

• A maximum of 12.5 percent rate of Interest can be offered by an NBFC to its customers. Such interest can be compounded or be paid at a frequency of at least a month.
• Public deposits can be accepted or renewed by NBFC for a minimum period of 12 months and a maximum period of 60 months.
• NBFCs cannot accept deposits repayable on demand.
• The deposits are not insured.
• The RBI does not guarantee the repayment of deposits.

NBFCs are under the strict regulations and control by the Reserve Bank of India (RBI). A small mistake conducted by the NBFC may result to huge fine or even the suspension of license.

Conclusion

NBFCs play a very vital and important role in contributing towards the economic growth and strengthening the economic infrastructure of the country. The NBFCs are bound to adhere to the compliances of the RBI and are not allowed to provide any services that go beyond the scope of by laws. However, sometimes such restriction does not allow NBFC to operate freely, and that is why the governing authorities alter the relevant provisions every now and then to keep up with the right balance between risks and working easily. A complete overview of regulations for NBFCs has been discussed in the above article.

With the development of the economy, the need for financial credit is bound to escalate and NBFCs have the ability to contribute extremely in the growth of the Indian economy. Where earning profits is something that is a top priority for every business venture, this is not the case for NBFCs. The main purpose of NBFCs is to provide easy financial credit to the economically weaker sections of society.

Also, Read: A Complete Summary of NBFC Compliance under FEMA