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NBFC Compliance Understanding the Regulations

NBFC Compliance: Understanding the Regulations
Shivam Narwal
| Updated: Apr 26, 2023 | Category: NBFC

Non-Banking Financial Companies (NBFCs) play an important part in the Indian financial system by lending to different sectors of the economy. However, given the inherent dangers connected with lending and borrowing, a strong regulatory structure is required to protect the interests of all stakeholders. This blog provides an overview of India’s NBFC regulatory structure as well as the important NBFC compliance standards that NBFCs must follow.

India’s NBFC Regulatory Framework

The Reserve Bank of India (RBI)[1] regulates NBFCs in accordance with the rules of the Reserve Bank of India Act, 1934. The regulatory framework for NBFCs is designed to ensure the financial system’s stability and soundness, protect depositors’ interests, and promote financial inclusion. The regulatory framework for NBFCs is built on the idea of proportionality, which indicates that regulatory requirements are proportionate to the NBFC’s size, complexity, and risk profile. The regulatory framework for NBFCs is separated into two different categories:

  1. SI-NBFCs (Systemically Important NBFCs): SI-NBFCs are NBFCs having assets of at least Rs. 500 crores. These NBFCs are more closely regulated because they may have an impact on the financial system’s stability. Comparatively speaking to other NBFCs, SI-NBFCs are subject to stricter regulatory restrictions.
  2. Non-SI-NBFCs (Not Important NBFC Systematically): NBFCs having assets under Rs. 500 crores are classified as non-SI NBFCs. In comparison to SI-NBFCs, these NBFCs face less regulatory monitoring. However, they must still adhere to the regulatory standards established by the RBI.

Types of NBFCs registered with RBI

There are different types of NBFCs registered with the Reserve Bank of India. Some examples are as follows:

  • Based on Activities:
  1. Investment and Credit Company
  2. Asset Finance Company
  3. Loan Companies
  4. Non-Operative Finance Companies
  5. Housing Finance Companies
  6. Micro Finance Companies
  • Based on liabilities:
  1. Non-deposit accepting NBFCs.
  2. Deposit accepting NBFCs.

What are the important requirements for NBFC Compliance?

NBFCs must abide by a number of regulatory standards set forth by the RBI. Below are some of the main NBFC compliance criteria that are covered:

  • Registration with RBI: Before starting their operations, all NBFCs must get a Certificate of Registration (CoR) from the RBI. The CoR must be renewed before it expires because it has a five-year validity span.
  • Capital Adequacy: According to the RBI’s guidelines, NBFCs must maintain a certain level of capital adequacy. The capital adequacy ratio (CAR) is determined by dividing the company’s capital by its risk-weighted assets. The RBI has mandated a 15% CAR minimum for NBFCs. In addition, NBFCs must adhere to a number of additional prudential standards, including maintaining a certain level of liquid assets, maintaining a loan-to-value ratio, and adhering to standards for asset categorization and provisioning.
  • KYC and AML Requirement: NBFCs must abide by Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations to avoid the financial system being used for unlawful purposes. NBFCs are expected to obtain and confirm the identification of their clients, keep track of transactions, and alert the Financial Intelligence Unit (FIU) to any questionable activity.
  • Reporting Requirements: NBFCs are obliged to submit a number of reports to the RBI, including annual reports, monthly returns, and periodic financial statements. The RBI uses these reports to keep an eye on NBFCs’ financial situation and confirm that regulatory standards are being followed.
  • Company Governance: NBFCs must follow the firm’s corporate governance guidelines, which include keeping a board of directors, selecting independent directors, and forming several committees, including audit and risk management committees. The corporate governance standards are designed to encourage accountability and transparency in NBFC operations.
  • Deals involving Related Parties: NBFCs must seek prior board of directors approval for any related party transactions and report them in their financial statements. In order to avoid conflicts of interest and guarantee fair dealing, related party transaction regulations were created.

Annual NBFC Compliance

A vital part of managing an NBFC is ensuring annual compliance since it ensures the NBFC works sustainably and responsibly and complies with regulatory standards. NBFCs must adhere to the following yearly compliance requirements:

  1. Annual reports and financial statements: A yearly report and financial statements must be prepared and submitted by NBFCs to the Reserve Bank of India (RBI) and other regulatory bodies. The cash flow statement, balance sheet, profit and loss account, and notes to accounts should all be included in the financial statements. The annual report must include details on the NBFC’s financial performance, risk management procedures, and corporate governance.
  2. Statutory Audit: A statutory audit of an NBFC’s financial statements must be performed by an impartial auditor who is certified by the Institute of Chartered Accountants of India (ICAI). Whether the financial statements present a truthful and fair picture of the NBFC’s financial situation and performance should be the subject of the statutory auditor’s assessment.
  3. Internal Audit: NBFCs must perform an internal audit of their business processes, risk management procedures, and internal controls. An experienced internal auditor who is independent and accountable to the board of directors of the NBFC should conduct the internal audit.
  4. Annual return filing: Annual returns must be filed with the Registrar of Companies (ROC) within 30 days & 60 days from the conclusion of the annual general meeting, respectively, using Form AOC-4 NBFC (IND AS) & MGT-7.
  5. Income tax return: An individual or corporation that receives any income during a fiscal year is required to file a return each year, according to the income tax requirements. The remuneration, company benefits, pay from real estate, or earnings from profits, premiums, capital additions, or other sources are all possible forms of payment. Thus, NBFCs have to file for income tax return annually.

Types of Returns that has to be filed by NBFCs to the RBI

  • NBS-1 Return: NBFCs with public deposits are required to file this return on a quarterly basis. The goal is to record financial information such as profit and loss, exposure to delicate industries, etc.
  • NBS-2 Return: This return on Prudential Norms must be submitted quarterly by NBFCs accepting public deposits. The goal is to record compliances with various prudential standards.
  • NBS-3 Return: Every NBFC is likewise required to submit this quarterly return. Information about statutory investments in liquid states is included in this return.
  • NBS-4 Return: This return must be filed by any rejected business that has public deposits. It’s a yearly return. In the past, rejected companies had to file NBS-5; presently, it is NBS-4.
  • NBS-6 Return: NBFCs that accept deposits and have total assets of at least 100 crores must submit this monthly return.
  • Half-yearly ALM Returns: NBFCs that accept public deposits totalling more than 20 crores are required to file this return. Their asset size exceeds 100 crores as well.
  • Branch Information Report: Each and every NBFC that accepts public deposits is required to file this quarterly report.

Challenges involved in NBFC Compliance

While NBFCs must comply with regulatory regulations, doing so might provide a number of difficulties. The following is a discussion of some of the typical difficulties involved in NBFC Compliance have in adhering to regulatory requirements:

  1. Complex regulations: NBFC Compliance might be difficult because to the complexity and regular changes in the NBFC regulatory framework.
  2. Cost of personnel: It can be expensive to comply with regulatory regulations, especially for smaller NBFCs that do not have the funds to recruit specialised compliance personnel.
  3. Lack of clarity: It may be difficult to comply with some regulatory standards because they are unclear or open to interpretation.
  4. Very time consuming: The time required to comply with regulatory regulations may take resources away from core business operations.


In conclusion, the regulatory framework for Non-Banking Financial Companies (NBFCs) in India is intended to support the stability and soundness of the financial system, safeguard the interests of depositors, and promote financial inclusion. The Indian economy is greatly impacted by NBFCs, which lend to a variety of industries and offer people and businesses an alternate source of funding. It is necessary for NBFCs to adhere to the regulatory criteria set by the Reserve Bank of India (RBI), nonetheless, considering the risks connected with borrowing and lending. The RBI has established specific compliance standards for NBFCs, including those for related party transactions, capital adequacy, reporting, and KYC/AML procedures.

Read our Article:How to Get NBFC Registration Certificate from RBI?

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Shivam Narwal

Shivam Narwal, a motivated final year BBA LLB law student at Chandigarh University, has started his legal career at Swarit Advisors as a legal researcher. With a strong focus on thorough and accurate research, Shivam is dedicated to delivering exceptional results. Throughout his studies, he has shown a deep understanding of the legal system and a drive to excel in the field of Law. 


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