NBFC Registrations

Definition

An NBFC (Non-Banking Financial Company) provides similar services as a Traditional Bank except issuing on Demand drafts and cheques. NBFC mainly provides financial services to individuals and Businesses. The principal objectives of Non-Banking Financial Company to provide loans and advances, working capital loans, Personal loans, Investment in shares, debentures and other stocks issued by Government or other local authorities, insurance business, leasing, hire-purchase or offering Market Place Lending (P2P) Platform.

In general, NBFC is meeting the gap in financial needs for the organized and unorganized individuals and business. In the recent times, banks are focusing on Mid-Size loan to SME/MSME and Large Corporate as well to selected individuals with excellent credit scores where in case of Loan from the bank is against collateral or income. This gap creates an opportunity for NBFC to enlarge its presence in the financial market.

NBFC Provides quick loan services in comparison to the bank, this is the reason NBFC is growing faster than traditional Bank and RBI is also encouraging the NBFC to come into the financial sector and work for financial inclusion. Developing Countries like India, where less than 1 in 10 people have a documented credit history. Indian Fintech Start-ups have been using alternative credit scoring model to approve or reject the loan application. NBFC registration and further Operations of financial services are regulated by the Companies act 2013 and RBI Act 1934. The Reserve bank of India is the supreme regulator of NBFC in India. Credit growth of NBFCs is recorded at 24.3% per year as against 21.4% for banks.

NBFC Registration –

If you are planning to start a finance business, the 1st Step is to incorporate a Private Limited Company or Public limited company under Companies act 2013. After Company formation, and Bank Account opening, there is a need to create a fixed deposit of Rs. 20 Million and approach NBFC-COR Division of the RBI. Application for COR must be filled in the prescribed manner.

The Designed officer of RBI will conduct proper due diligence and proper examination of the founder’s backgrounds, verification of shareholder’s profile and source of fund. If everything is clean and as per the satisfaction of RBI COR Committee, then within a time frame of 90 to 120 days, RBI may issue Certificate of registration or NBFC License. Non-banking financial company shall not commence or carry on the business of Non- Banking Financial Institution without obtaining a Certificate of Registration or NBFC License issued by the Reserve Bank of India.

Classification of NBFCs

It is noteworthy that A non-banking institution which is a company and has a principal business of receiving deposits (under any scheme or arrangement) in one lump sum or in installments by way of contributions or in any other manner, is also a Non Banking Financial Company. Since December 2006 three broad categories of NBFCs exist in India:

  • Investment Companies
  • Loan Companies
  • Finance Companies

Advantages of fresh NBFC Registration

  • Low Legal Risk – If you are applying for fresh NBFC License Application, no need to worry about the Past Non-Compliances. In case of NBFC Takeover, Any Past Non-compliance with RBI Act may lead to cancellation of NBFC License.
  • Timeline – Fresh NBFC Registration can be completed in a period of 90 to 120 days with 90 % to 95% Success ratio at overall in our experience. At the other side, NBFC Takeover takes 5 months to 12 months time. In case you are a foreigner after Nod from Department of Non-Banking supervision again you need to apply for permission before the Foreign Exchange department of RBI, which again may take minimum 3 months’ time. At overall acquiring an NBFC by foreigner takes 12-15 months’ time and acquisition by Indian Shareholders may take about to 5 to 9 Months. In our experience, only 30% Takeover Deal was successful in past 5 years.
  • Title Risk – There is no title risk of Ownership after New NBFC Registration as you are the 1st shareholder of the company at another side in acquiring an existing NBFC, you will not able to establish the clear title of shares. As in 80% NBFC takeover case, we have experienced that target company has no documentary evidence about the transfer of ownership. Merely equity shares were transferred to ROC Records. The Share transfer deed has not been executed.
  • Tax Liability – There are no assets held by newly incorporated company hence there is no short term or long term gain but at another side, if you are acquiring existing NBFC, you need to prepare for future Capital gain liability, Penalty from Registrar of companies etc.
  • Capital – In the case of fresh NBFC License application, you may need to block your Rs. 2 Cr / Rs. 20 Million FD in Bank Account and definitely you will earn some amount of interest in it. At another side, in a case of the takeover, the proposed shareholders are required to submit the Bankers report stating the Bank Balance equivalent to book value of the shares.

Scope of our services –

  • Advisory for Fintech Based Credit Assessment model
  • Assistance in SOP of the Organization
  • Assistance in designing your loan product
  • Helping founders in preparing to Go to market strategy
  • Assistance in drafting / Reviving agreements/Contracts as required to operate the NBFC.
  • Finalizing reporting formats from various verticals of the organization
  • Guidance on Digital Marketing and support in achieving lower customer acquisition cost
  • Assistance in designing Company Policies (HR, Credit, Risk, Delinquency management & Recovery)
  • Development of High-Level Business Plan
  • Warm Introduction to venture capitalist for Series-A Investment in the company
  • Assistance in fundraising process via FDI Automatic route
  • Advisory on Adoption of Ind-AS
  • Internal Audit Services
  • Virtual CFO Services
  • Assistance in meeting Secretarial compliances
  • Assistance in meeting RBI Compliance
  • On-Demand Service of independent director
  • Company formation Pvt. Or Public Ltd
  • NBFC Business Plan
  • NBFC Registration with RBI
  • Business Plan & Market Analysis
  • Product advisory
  • Advisory on building Fintech based lending Business model
  • Assistance in Application for Cor
  • Advisory on Alternative Credit scoring model
  • Advisory on Software process map and paperless lending model
  • Annual Compliance of NBFC
  • Internal Audit
  • Digital Marketing
  • On-Demand Legal Advisory
  • Legal Advisory

Regulatory for Fintech In India –

  • RBI is a Top regulator for Financial inclusion, Payment business, PPI, Payment processing, Alternative banking, P2P, Forex & online lending business model
  • IRDA is the regulator for Insurance web aggregator and other insurance-related Business
  • SEBI is the regulator for Robotic investment advisory

NBFC – Good Choice for Fintech Startups

Traditional banks are operating as a classic business model like – Brick and Mortar branch’ this cost a lot in the opening and running a branch.  At another side NBFC with Fintech Business model, they operate from one office and focusing on the digital presence and entire customer acquisition is either online or Application sourcing from DSA (Direct selling agent). You can apply for NBFC License with a Net owned fund Rs. 2 Cr / Rs. 20 Million.

NBFC in India are primarily focused on meeting the financial needs of the underserved section while Banks target upon the organized sector like big business houses and salaried individuals.

The Bank has slow loan processing as compare to NBFC. Non Banking Financial Company has quick loan sanctioning process. If a person applies for Loan from NBFC the paperwork is less as compared to a bank. Because NBFC deploys alternative data points to assess the loan eligibility of the applicant. Hence, credit decisions are very fast in NBFC.

Regulation of NBFCs

Depending on the type of NBFCs registered under Section 3 of the Companies Act 1956 there are regulators as follows:

  • NBFCs Registered with RBI- Regulation, Supervision, Surveillance and Enforcement under RBI
  • NBFCs Regulated by Other Regulators- Find below the Authority for Regulation, Supervision, Surveillance and Enforcement, depending on the type of Financial Institutions:
  • Housing Finance Institutions-National Housing Bank
  • Merchant Banking Company/ Venture Capital Fund Company/ Stock Broking/ Collective Investment Schemes (CIS)-Security and Exchange Board of India
  • Nidhi Companies and Mutual Benefit Companies-Ministry of Corporate Affairs
  • Chit Fund Companies-State Government
  • Insurance Companies-The Insurance Regulatory and Development Authority
  • Non Banking Non Financial Companies- Regulation, Supervision and Surveillance under the Companies Act 1956.

Regulator: Ministry of Corporate Affairs

Enforcement Agency: State Government

Pre-Requirements for NBFC Registration

In order to obtain a proper and secure registration compulsory requirements are as follows:

  • Applicant company should be registered as per the Rules, Regulations and Provisions given in the Companies act, 2013 or the earlier Companies Act 1956.
  • If a company engaged in the business of any of the above mentioned fields, produces finance flow from that particular business, which is more than 50% of the total capital asset of the company for any year, the NBFC certificate is mandatory.
  • The applicant company should have a paid-up capital fund of INR-2 Crore. In case of a Foreign Company desirous of of setting up an NBFC in India, should have a paid up equity share capital of 5 Crore.
    Note: The Net Owned Fund mentioned above has to be present in Company’s bank account at the time of filing Application.

Process of Registration

  • An online application is to be made in the prescribed format with information regarding the demanded documents and enclosures, which generates a Company Appliacation Reference Number.
  • A hard copy of the above mentioned application along with demanded documents and enclosures to the concerned Regional Office of the RBI.
  • After the verification and approval of the submitted application and documents, the regional office sends the application to the Central office of RBI, which goes through crucial examination in order to grant the Certificate.
  • If the terms and conditions under section 45-I A of the RBI Act, 1934 are fully satisfied the Certificate will be granted.

Documents required for registration as Type I – NBFC-ND

An indicative list of basic documents/information to be furnished along with the application form:

Sr. No. Requirements to be complied with and documents to be submitted to RBI by Companies for obtaining certificate and Registration from RBI as NBFC Page no. in  file
1 Certified copies of Certificate of Incorporation and Certificate of Commencement of Business in case of public limited companies.
2 Certified copies of extract of only the main object clause in the MOA relating to the financial business.
3 Board resolution stating that:

a)    the company is not carrying on any NBFC activity/stopped NBFC activity and will not carry on/commence the same before getting registration from RBI

b)    the UIBs in the group where the director holds substantial interest or otherwise has not accepted any public deposit in the past /does not hold any public deposit as on the date and will not accept the same in future

c)     the company has formulated  “Fair Practices Code” as per RBI Guidelines

d)    the company has not accepted public funds in the past/does not hold any public fund as on the date and will not accept the same in the future without the approval of Reserve Bank of India

e)    the company does not have any customer interface as on date and will not have any customer interface in the future without the approval of Reserve Bank of India

4 Copy of Fixed Deposit receipt & bankers certificate of no lien indicating balances in support of NOF
5 For companies already in existence, the Audited balance sheet and Profit & Loss account along with directors & auditors report or for the entire period the company is in existence, or for last three years , whichever is less, should be submitted
6 Banker’s report in respect of applicant company, its group/subsidiary/associate/holding company/related parties,  directors of the applicant company having substantial interest in other companies  The Banker’s report should be about the dealings of these entities with these bankers as a depositing entity or a borrowing entity.

Note: Please provide bankers report from all the bankers of each of these entities and provide the report for all the entities. The details of deposits and loans balances as on the date of application and the conduct of the account should be specified.

Documents required for registration as Type II – NBFC-ND (including new applications of NBFC-MFI, NBFC-Factor, NBFC-IDF)

An indicative list of basic documents/information to be furnished along with the application form:

Sr. No. Requirements to be complied with and documents to be submitted to RBI by Companies for obtaining certificate and Registration from RBI as NBFC Page no. in file
1 Certified copies of Certificate of Incorporation and Certificate of Commencement of Business in case of public limited companies.
2 Certified copies of extract of only the main object clause in the MOA relating to the financial business.
3 Board resolution stating that:

a)    the company is not carrying on any NBFC activity/stopped NBFC activity and will not carry on/commence the same before getting registration from RBI

b)    the company has not accepted any public deposit, in the past (specify period)/does not hold any public deposit as on the date and will not accept the same in future without the prior approval of Reserve Bank of India

c)     the UIBs in the group where the director holds substantial interest or otherwise has not accepted any public deposit in the past /does not hold any public deposit as on the date and will not accept the same in future

d)    the company has formulated  “Fair Practices Code” as per RBI Guidelines

4 Copy of Fixed Deposit receipt & bankers certificate of no lien indicating balances in support of NOF
5 For companies already in existence, the Audited balance sheet and Profit & Loss account along with directors & auditors report or for the entire period the company is in existence, or for last three years, whichever is less, should be submitted
6 Copy of the certificate of highest educational and professional qualification in respect of all the directors
7 Copy of experience certificate, if any, in the Financial Services Sector (including Banking Sector) in respect of all the directors
8 Banker’s report in respect of applicant company, its group/subsidiary/associate/holding company/related parties, directors of the applicant company having substantial interest in other companies  The Banker’s report should be about the dealings of these entities with these bankers as a depositing entity or a borrowing entity.

Note: Please provide bankers report from all the bankers of each of these entities and provide the report for all the entities. The details of deposits and loans balances as on the date of application and the conduct of the account should be specified.

Frequently Asked Questions on NBFC Registration

  1. Is a registered NBFC is a financial Institution?
  2. Yes. NBFCs are the companies registered under the Companies Act, 2013 and after company registration, You need to obtained Certificate of registration or NBFC License from the reserve bank of India.
  3. What are the NBFC Registration Fees?
  • For registering a Private Limited company with Capital Rs. 2 Cr, you will require to pay a government fees Approximate Rs. 3,50,000 ($ 5000 to $ 6000 ).
  • Need to hire highly experienced consultants that may cost you on average Rs. 7 to 8 lac, the advisory firm should be eligible to help you in building the business, merely NBFC license is not sufficient. You need an advisory who can help you raising fund.
  1. What are the NBFC compliances after COR?
  2. After you successfully complete the NBFC Registration Process and from here need to follow the RBI Guidelines, Circular, and notices published in the public domain from time to time.
  • Need to obtain membership from all four Credit rating agencies (CIBIL, Equifax, Experian and CRIF Highmark), if you are willing to have credit scoring from API, Please use Equifax.
  • Apply for E-KYC Registration & Regular reporting of the borrowers.
  • FIU Registration.
  • Secretarial compliances.
  • Statutory Audit.
  • Tax Audit.
  • Income tax Returns.
  • ROC Returns.
  • Filling of NBS-9 by use of Online Platform of RBI (COSMOS).
  1. What are the sources of funds for an NBFC?
  2. Yes. NBFCs are the companies registered under the Companies Act, 2013 and after company registration, You need to obtained Certificate of registration or NBFC License from the reserve bank of India.
  3. What are the Categories of NBFC in India?
  4. By Deposit following Classification
  • Deposit accepting NBFCs (Type -1)
  • Non-Deposit accepting NBFCs (Type -2)

Note – Currently is not issuing NBFC license/ COR for Deposit-taking NBFC.

  1. What is Deposits Taking NBFC?
  2. Deposit-taking NBFC is a type-1 NBFC, is eligible for accepting Public deposits 1.10 time of its Net worth subject to prior approval from the Reserve bank of India. 2 years ago the Deposit-taking NBFC Registration was very popular. RBI has experienced that small companies who obtained the NBFC License for accepting Public Deposit have defaulted in the repayment of deposits. In the past 2 years, RBI strictly views and industry have experienced close watch over the operations of the NBFC-D.

In Public interest, and preventing deposit-taking NBFCs to not misuse the NBFC License issued by RBI, there have been certain Strict limitations imposed and conditions specified, for accepting deposits by the NBFCs. In our Opinion, RBI may not grant new NBFC License or Substantial Change in shareholding in the Existing NBFC-D.

  1. What is the NBFC Registration Procedure?
  2. RBI has simplified the NBFC Registration Process after 2016, in the recent few months RBI has issued more than 100+ new NBFC License to the entrepreneurs.

RBI is a completely autonomous body, the DNBR has transparent assessment process. Hence, during the NBFC registration process, if they noticed need of any additional documents they will email you or send you a formal notice, within 30 days, you must respond to their query.

If you are genuine enough then you can expect NBFC license in 90 to 120 days. Before the filing of Application for COR (Certificate of registration), You can follow the following indicative checklist. For further details, you are requested to carefully read the RBI Circular.

  • Select a Consultant with Minimum 10 years of Experience in NBFC & Banking laws
  • Scrutinize the Consultant past experience, the Firm must have a team size of 50 to 100 with Combination of professionals like CA, CS, Lawyer, and Senior Banker.
  • Ask NBFC Consultant to give you the minimum 3 references of clients who have obtained NBFC License in previous 2 Months.
  • After Adequate verification, Sign SLA (Service level agreement) with a reputed CA/ Law Firm / Banking Advisory firm
  • Ask NBFC Consultants to register a Private Limited company or Public Limited Company
  • Open a Current account with a Scheduled commercial bank
  • Ask NBFC Consultants to create a high-Level Business plan for the NBFC (Financial projections for sixty Months). The NBFC business Plan must contain a comprehensive analysis of the loan product, Lending process, Market research, SWOT analysis, Founders Profile, Credit Risk and Assessment model.
  • Create Fixed Deposit of Rs. 2 Cr / 20 Million and such Fixed Deposit shall be held in your bank A/c for the assessment Period or until you clear the eligibility process of NBFC License.  The timeline for NBFC Registration may be in the range of 90 to 120 days. As soon NBFC License is granted by the RBI, you can break the Fixed deposit held in your bank Account. Over the Life of NBFC, the Minimum net owned fund Rs 2 Cr. must be maintained.
  • Ask NBFC Consultants to submit the online COR application on RBI’s website (COSMOS)
  • NBFC Consultant will scrutinize all documents before physical submission of documents to RBI. Even a single mistakes or false submission of facts/ Documents in Application may lead to rejection of your application for COR.
  • Physical Submission of COR application to RBI’s NBFC COR Department along with all supporting documents
  • The Designated officer from Department of Non-Banking Regulation shall correspond you via email or Written Notice for additional submission of documents
  • You need to respond/ Reply to RBI Notices from the time to time
  • The NBFC license may be granted by the Department of Non-Banking regulation only after vigilant inspection of the application, Shareholders, Founders, and documents attached to it.
  1. What is the NBFC Registration/NBFC License Requirement?
  2. Before the filing of Application for COR with RBI, you need to understand what are the documents required for NBFC registration or NBFC license.
  • Register a Private Limited Company/ Public Limited company
  • The Middle name of Company Must be Finance, Finserv, final, Investment, Capital Fintech, Leasing e.t.c
  • The object clause in the MOA clearly depicting the financial/Investment business.
  • Obtain a Certified copy of Certificate of Incorporation, MOA & AOA from the Regional registrar of companies
  • KYC & Income proof of Directors and shareholders
  • CA Certified Net worth certificate of Directors, Shareholders, and Company
  • Obtain a Banker report about the no Lien remark on the Initial Fixed deposit of Rs 2 Cr / Rs 20 Million.
  • Appointment of an experienced chartered accountant in practice as Auditor of the applicant company
  • Submit highest educational/professional qualification of the directors of the Applicant company
  • Credit report of Directors and shareholders
  • Submit at least one Director’s profile with 10+ years of Senior management experience in the Financial Services Sector Like NBFC / Bank. The technical director may be a Non-Executive Director or Executive Director.
  • Submit a clean Bankers report of the applicant company, Directors, Shareholders depicting details of deposits and loans balances as on the date of application
  • Verify Credit rating report of Directors and Shareholders, they should not have any default in repayment of the loan or financial facilities over the life. In case delay in repayment of a loan, with proper clarification RBI May accept the application for COR.
  • Source of the fund for initial capital Rs. 20 Million / Rs. 2 Cr Must not be a borrowed capital
  • The Applicant company should have a high-level business plan to prove the need for NBFC License
  • Submit a detail action plan about the Loan products, Fair Practice code, Credit and Risk Assessment Policy
  • Organizations structure and decision-making process for approval/Rejection of a loan application
  • Submit Information technology policy in case you lend via the use of FinTech based lending model
  • Submit a declaration about No default or conviction under NI/CPC/CrPC /FEMA/PMLA
  • Submit a true copy of Audited Balance sheet and Profit & Loss account along with directors & auditors report of at least 3 years of Holding company (Required in case applicant is the subsidiary of a Private Limited company or Public Limited company or foreign company)
  • In case of FDI, Necessary FDI Compliance as per FEMA Act must have complied

Other relevant documents on request

  1. What is meant by principal business in the context of a registered NBFC?
  2. If an NBFC has more than 50 percent of the total assets or revenue from financial services comprises more than 50 percent of the gross income. A company fulfilling both these conditions will be eligible to Apply for NBFC license to the RBI.
  3. Can NBFCs accept deposits?
  4. Only those NBFCs which have been granted a license depicting their eligibility to accept deposits from the public shall proceed for the same. However, such deposits are not demanded deposits.
  5. . What is the maximum limit to accept deposits from the public?
  6. An unrated NBFC complying with all the prudential norms and maintaining capital adequacy ratio of at least 15% and having NOF of 25 Lakhs is allowed to accept or renew public deposits not exceeding 1.5 times of its NOF or up INR 10 crores, whichever is lower.

On the other hand, a rated NBFC complying with all the prudential requirements are allowed to accept deposits up to 4 times of their NOF.

  1. Does every NBFC required to be registered with RBI?
  2. The Reserve Bank of India (RBI) controls the working of all NBFCs under the framework of RBI Act, 1934 and directions issued by it from time to time. Therefore, every NBFC, to carry out its operations, is required to obtain NBFC license from the Reserve Bank of India to commence its business.
  3. What are the basic requirements for the takeover of NBFC?
  4. Prior approval of RBI is required to initiate any takeover of NBFC. An application is submitted on the letterhead of the company to the Regional office of the RBI for getting the approval. Once the approval is granted, a public notice in the leading newspaper shall be published. Thereafter, the Share-Purchase agreement is signed and takeover is affected. It shall further be kept in mind that only an NBFC can take over another NBFC.
  5. What is the definition of Net Owned Funds (NOF) of NBFC?
  6. The addition of paid-up equity share capital and free reserves as per the latest balance sheet of the company and deducting the following items from it:
  • Accumulated losses;
    •    Deferred Revenue expenditures;
    •    Other intangible assets;
    •    The consequential amount is further condensed by following items

Investment of such NBFCs in its subsidiaries, same group companies, and other NBFCs; the book value exceeding 10% of the amount calculated in (1) above, of debentures, bonds, outstanding loans and advances (including hire-purchase and lease finance) made to, and deposits with its subsidiaries or companies within the same group

  1. What shall be considered as Change in management in an NBFC?
  2. For any change in the shareholding resulting in 26 per cent acquisition/ transfer of the paid-up equity capital, or any takeover or acquisition of control of NBFC, or change in the management as a consequence of more than 30 % change in the Board excluding independent directors, prior approval from the Reserve Bank shall be taken. The application shall be made to the RBI for the approval, on the letterhead of the company along with all the necessary documents. The approval usually takes 1-3 months of processing time. After getting approval from RBI, a public notice shall be given in one leading national and one leading local newspaper. Then, the Share Purchase Agreement is prepared and signed, the management is handed over and the consideration remaining, if any, is paid off within the stipulated time of 31 days from public notice or such other time period as mutually agreed upon by the acquirer and transferee.
  3. Is FDI is allowed in Newly incorporated NBFC?
  4. There is no limitation on FDI in NBFC, but FDI must be in the form of T1 Equity. If you bring FDI at the initial stage of registration, you need to comply with FEMA Provisions along with the RBI Act.
  5. Is it necessary that every NBFC should be registered with RBI?
  6. In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial company can commence or carry on business of a non-banking financial institution without a) obtaining a certificate of registration from the Bank and without having a Net Owned Funds of ₹ 25 lakhs (₹ Two crore since April 1999). However, in terms of the powers given to the Bank, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982,Housing Finance Companies regulated by National Housing Bank, Stock Exchange or a Mutual Benefit company.
  7. What are systemically important NBFCs?
  8. NBFCs whose asset size is of ₹ 500 cr or more as per last audited balance sheet are considered as systemically important NBFCs. The rationale for such classification is that the activities of such NBFCs will have a bearing on the financial stability of the overall economy.

What are the different types/categories of NBFCs registered with RBI?

  1. NBFCs are categorized a) in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs, b) non deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and c) by the kind of activity they conduct. Within this broad categorization the different types of NBFCs are as follows:
  2. Asset Finance Company (AFC) : An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.
  3. Investment Company (IC) : IC means any company which is a financial institution carrying on as its principal business the acquisition of securities,

III. Loan Company (LC): LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.

  1. Infrastructure Finance Company (IFC): IFC is a non-banking finance company a) which deploys at least 75 per cent of its total assets in infrastructure loans, b) has a minimum Net Owned Funds of ₹ 300 crore, c) has a minimum credit rating of ‘A ‘or equivalent d) and a CRAR of 15%.
  2. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:-

(a) it holds not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in group companies;

(b) its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its Total Assets;

(c) it does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;

(d) it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies.

(e) Its asset size is ₹ 100 crore or above and

(f) It accepts public funds

  1. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) : IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.

VII. Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI): NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria:

  1. loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding ₹ 1,00,000 or urban and semi-urban household income not exceeding ₹ 1,60,000;
  2. loan amount does not exceed ₹ 50,000 in the first cycle and ₹ 1,00,000 in subsequent cycles;
  3. total indebtedness of the borrower does not exceed ₹ 1,00,000;
  4. tenure of the loan not to be less than 24 months for loan amount in excess of ₹ 15,000 with prepayment without penalty;
  5. loan to be extended without collateral;
  6. aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs;
  7. loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower

VIII. Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring. The financial assets in the factoring business should constitute at least 50 percent of its total assets and its income derived from factoring business should not be less than 50 percent of its gross income.

  1. Mortgage Guarantee Companies (MGC) – MGC are financial institutions for which at least 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business and net owned fund is ₹ 100 crore.
  2. NBFC- Non-Operative Financial Holding Company (NOFHC) is financial institution through which promoter / promoter groups will be permitted to set up a new bank .It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.
  3. What are the powers of the Reserve Bank with regard to ‘Non-Bank Financial Companies’, that is, companies that meet the 50-50 Principal Business Criteria?
  4. The Reserve Bank has been given the powers under the RBI Act 1934 to register, lay down policy, issue directions, inspect, regulate, supervise and exercise surveillance over NBFCs that meet the 50-50 criteria of principal business. The Reserve Bank can penalize NBFCs for violating the provisions of the RBI Act or the directions or orders issued by RBI under RBI Act. The penal action can also result in RBI cancelling the Certificate of Registration issued to the NBFC, or prohibiting them from accepting deposits and alienating their assets or filing a winding up petition.
  5. What action can be taken against persons/financial companies making false claim of being regulated by the Reserve Bank?
  6. It is illegal for any financial entity or unincorporated body to make a false claim of being regulated by the Reserve Bank to mislead the public to collect deposits and is liable for penal action under the Indian Penal Code. Information in this regard may be forwarded to the nearest office of the Reserve Bank and the Police.
  7. What action is taken if financial companies which are lending or making investments as their principal business do not obtain a Certificate of Registration from the Reserve Bank?
  8. If companies that are required to be registered with the Reserve Bank as NBFCs, are found to be conducting non-banking financial activity, such as, lending, investment or deposit acceptance as their principal business, without seeking registration, the Reserve Bank can impose penalty or fine on them or can even prosecute them in a court of law. If members of public come across any entity which does non-banking financial activity but does not figure in the list of authorized NBFC on RBI website, they should inform the nearest Regional Office of the Reserve Bank, for appropriate action to be taken for contravention of the provisions of the RBI Act, 1934.
  9. What are the regulations applicable on non-deposit accepting NBFCs with asset size of less than ₹ 500 crore?
  10. The regulation on non-deposit accepting NBFCs with asset size of less than ₹ 500 crore would be as under:

(i) They shall not be subjected to any regulation either prudential or conduct of business regulations viz., Fair Practices Code (FPC), KYC, etc., if they have not accessed any public funds and do not have a customer interface.

(ii) Those having customer interface will be subjected only to conduct of business regulations including FPC, KYC etc., if they are not accessing public funds.

(iii) Those accepting public funds will be subjected to limited prudential regulations but not conduct of business regulations if they have no customer interface.

(iv) Where both public funds are accepted and customer interface exist, such companies will be subjected both to limited prudential regulations and conduct of business regulations.

  1. What are the various prudential regulations applicable to NBFCs?
  2. The Bank has issued detailed directions on prudential norms, vide Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007, Non-Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 and Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015. Applicable regulations vary based on the deposit acceptance or systemic importance of the NBFC.

The directions inter alia, prescribe guidelines on income recognition, asset classification and provisioning requirements applicable to NBFCs, exposure norms, disclosures in the balance sheet, requirement of capital adequacy, restrictions on investments in land and building and unquoted shares, loan to value (LTV) ratio for NBFCs predominantly engaged in business of lending against gold jewellery, besides others. Deposit accepting NBFCs have also to comply with the statutory liquidity requirements. Details of the prudential regulations applicable to NBFCs holding deposits and those not holding deposits is available in the section ‘Regulation – Non-Banking – Notifications – Master Circulars’ in the RBI website.

  1. Please explain the terms ‘owned fund’ and ‘net owned fund’ in relation to NBFCs?
  2. ‘Owned Fund’ means aggregate of the paid-up equity capital, preference shares which are compulsorily convertible into equity, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset, after deducting therefrom accumulated balance of loss, deferred revenue expenditure and other intangible assets. ‘Net Owned Fund’ is the amount as arrived at above, minus the amount of investments of such company in shares of its subsidiaries, companies in the same group and all other NBFCs and the book value of debentures, bonds, outstanding loans and advances including hire purchase and lease finance made to and deposits with subsidiaries and companies in the same group, to the extent it exceeds 10% of the owned fund.
  3. Whether acquisition/ transfer of shareholding of 26 per cent or more of the paid up equity capital of an NBFC within the same group i.e. intra group transfers require prior approval of the Bank?
  4. Yes, prior approval would be required in all cases of acquisition/ transfer of shareholding of 26 per cent or more of the paid up equity capital of an NBFC. In case of intra-group transfers, NBFCs shall submit an application, on the company letter head, for obtaining prior approval of the Bank. Based on the application of the NBFC, it would be decided, on a case to case basis, whether the NBFC requires to submit the documents as prescribed at para 3 of DNBR (PD) CC.No. 065/03.10.001/2015-16 dated July 9, 2015 for processing the application of the company. In cases where approval is granted without the documents, the NBFC would be required to submit the same after the process of transfer is complete.
  5. NBFCs are charging high interest rates from their borrowers. Is there any ceiling on interest rate charged by the NBFCs to their borrowers?
  6. Reserve Bank of India has deregulated interest rates to be charged to borrowers by financial institutions (other than NBFC- Micro Finance Institution). The rate of interest to be charged by the company is governed by the terms and conditions of the loan agreement entered into between the borrower and the NBFCs. However, the NBFCs have to be transparent and the rate of interest and manner of arriving at the rate of interest to different categories of borrowers should be disclosed to the borrower or customer in the application form and communicated explicitly in the sanction letter etc.
  7. RBI permits NBFCs to hedge their exposure through dealing in IRFs. Currently, IRFs are on single stock 10 yr 8.40% 2024 security. The Composition of Balance Sheet is mix of fixed/ floating interest rate and different credit profile. Whether 10 yr single security can be used for hedging 2-3 yr liability and asset (Duration adjusted) or can be used for investment in other long tenor securities or corporate bonds. Alternatively, whether IRFs can be used holistically for hedging assets and liabilities in dynamic interest rate scenarios within total Balance Sheet amount and within hedging definition?
  8. IRF may be used to hedge interest rate risk associated with single asset/ liability or a group of assets/ liabilities. Hence, NBFCs are permitted to use duration based hedging for managing interest rate risk.
  9. Whether NBFCs as trading member can participate in the IRF market only for hedging or can also take trading position?
  10. As per extant guidelines NBFCs with asset size of ₹ 1,000 cr and above are permitted to participate in IRF as trading members. While, trading members of stock exchanges are permitted to execute trades on their own account as well as on account of their clients, banks and PDs have been allowed to deal in IRF for both hedging and trading on own account and not on client’s account. Similarly, NBFCs as trading members are permitted to execute their proprietary trades and not to undertake transactions on behalf of clients.
  11. Can all NBFCs accept deposits? Is there any ceiling on acceptance of Public Deposits? What is the rate of interest and period of deposit which NBFCs can accept?
  12. All NBFCs are not entitled to accept public deposits. Only those NBFCs to which the Bank had given a specific authorisation and have an investment grade rating are allowed to accept/ hold public deposits to a limit of 1.5 times of its Net Owned Funds. All existing unrated AFCs that have been allowed to accept deposits shall have to get themselves rated by March 31, 2016. Those AFCs that do not get an investment grade rating by March 31, 2016, will not be allowed to renew existing or accept fresh deposits thereafter. In the intervening period, i.e. till March 31, 2016, unrated AFCs or those with a sub-investment grade rating can only renew existing deposits on maturity, and not accept fresh deposits, till they obtain an investment grade rating.

However, as a matter of public policy, Reserve Bank has decided that only banks should be allowed to accept public deposits and as such has since 1997 not issued any Certificate of Registration (CoR) to new NBFCs for acceptance of public deposits.

Presently, the maximum rate of interest an NBFC can offer is 12.5%. The interest may be paid or compounded at rests not shorter than monthly rests. The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.

  1. In respect of companies which do not fulfill the 50-50 criteria but are accepting deposits – do they come under RBI purview?
  2. A company which does not have financial assets which is more than 50% of its total assets and does not derive at least 50% of its gross income from such assets is not an NBFC. Its principal business would be non-financial activity like agricultural operations, industrial activity, purchase or sale of goods or purchase/construction of immoveable property, and will be a non-banking non-financial company. Acceptance of deposits by a Non-Banking Non-Financial Company are governed by the rules and regulations issued by the Ministry of Corporate Affairs.
  3. Why is the RBI so restrictive in allowing NBFCs to raise public deposits?
  4. The Reserve Bank’s overarching concern while supervising any financial entity is protection of depositors’ interest. Depositors place deposit with any entity on trust unlike an investor who invests in the shares of a company with the intention of sharing the risk as well as return with the promoters. Protection of depositors’ interest thus is supreme in financial regulation. Banks are the most regulated financial entities. The Deposit Insurance and Credit Guarantee Corporation pays insurance on deposits up to ₹ One lakh in case a bank failed.
  5. Which are the NBFCs specifically authorized by RBI to accept deposits?
  6. The Reserve Bank publishes the list of NBFCs that hold a valid Certificate of Registration for accepting deposits on its website: www.rbi.org.in → Sitemap → NBFC List → List of NBFCs Permitted to Accept Deposits. At times, some companies are temporarily prohibited from accepting public deposits. The Reserve Bank publishes the list of NBFCs temporarily prohibited also on its website. The Reserve Bank keeps both these lists updated. Members of the public are advised to check both these lists before placing deposits with NBFCs.
  7. Whether NBFCs can accept deposits from NRIs?
  8. Effective from April 24, 2004, NBFCs cannot accept deposits from NRIs except deposits by debit to NRO account of NRI provided such amount does not represent inward remittance or transfer from NRE/FCNR (B) account. However, the existing NRI deposits can be renewed.
  9. Is nomination facility available to the Depositors of NBFCs?
  10. Yes, nomination facility is available to the depositors of NBFCs. The Rules for nomination facility are provided for in section 45QB of the Reserve Bank of India Act, 1934. Non-Banking Financial Companies have been advised to adopt the Banking Companies (Nomination) Rules, 1985 made under Section 45ZA of the Banking Regulation Act, 1949. Accordingly, depositor/s of NBFCs are permitted to nominate one person to whom the NBFC can return the deposit in the event of the death of the depositor/s. NBFCs are advised to accept nominations made by the depositors in the form similar to one specified under the said rules, viz Form DA 1 for the purpose of nomination, and Form DA2 and DA3 for cancellation of nomination and change of nomination respectively.
  11. How does the Reserve Bank come to know about unauthorized acceptance of deposits by companies not registered with it or of NBFCs engaged in lending or investment activities without obtaining the Certificate of Registration from it?
  12. NBFCs that ought to have sought registration from RBI but are functioning without doing so are committing a breach of law. Such companies are liable for action as envisaged under the RBI Act, 1934. To identify such entities, RBI has multiple sources of information. These include market intelligence, complaints received from affected parties, industry sources, and exception reports submitted by statutory auditors in terms of Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 2008. Further, the State Level Co-ordination Committees (SLCC) is convened by RBI in all the States/UTs on quarterly basis. The SLCC is now chaired by the Chief Secretary/ Administrator of the concerned State/UT and has, as its members, apart from the Reserve Bank, the Regional Directorate of the MCA/ ROC, local unit of SEBI, NHB, Registrar of Chits, ICAI, Economic Intelligence Unit of the State Police and officials from Law and Home Ministries of the State Government. As all the relevant financial sector regulators and enforcement agencies participate in the SLCC, it is possible to quickly share the information and agree on an effective course of action to be taken against entities indulging in unauthorized and suspect businesses involving funds mobilization from public.
  13. Can Proprietorship/Partnership Concerns associated/not associated with registered NBFCs accept public deposits?
  14. No. Proprietorship and partnership concerns are un-incorporated bodies. Hence they are prohibited under the RBI Act 1934 from accepting public deposits.
  15. There are many jewellery shops taking money from the public in instalments. Is this amounting to acceptance of deposits?
  16. It depends on whether the money is received as advance for delivering jewellery at a future date or whether the money is received with a promise to return the same with interest. The money accepted by Jewellery shops in instalments for the purpose of delivering jewellery at the end of the period of contract is not deposit. It will amount to acceptance of deposits if in return for the money received, the jewellery shop promises to return the principal amount along with interest.
  17. What action can be taken if such unincorporated entities accept public deposits? What if NBFCs which have not been authorized to accept public deposits use proprietorship/partnership firms floated by their promoters to collect deposits?
  18. Such unincorporated entities, if found accepting public deposits, are liable for criminal action. Further NBFCs are prohibited by RBI from associating with any unincorporated bodies. If NBFCs associate themselves with proprietorship/partnership firms accepting deposits in contravention of RBI Act, they are also liable to be prosecuted under criminal law or under the Protection of Interest of Depositors (in Financial Establishments) Act, if passed by the State Governments.
  19. What are the salient features of NBFC regulations which the depositor may note at the time of investment?
  20. Some of the important regulations relating to acceptance of deposits by NBFCs are as under:
  21. The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.
  22. NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 12.5 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests.
  • NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
  1. NBFCs should have minimum investment grade credit rating.
  2. The deposits with NBFCs are not insured.
  3. The repayment of deposits by NBFCs is not guaranteed by RBI.
  • Certain mandatory disclosures are to be made about the company in the Application Form issued by the company soliciting deposits.
  1. What precautions should a depositor take before placing deposit with an NBFC?
  2. A depositor wanting to place deposit with an NBFC must take the following precautions before placing deposits:
  3. That the NBFC is registered with RBI and specifically authorized by the RBI to accept deposits. A list of deposit taking NBFCs entitled to accept deposits is available at www.rbi.org.in → Sitemap → NBFC List. The depositor should check the list of NBFCs permitted to accept public deposits and also check that it is not appearing in the list of companies prohibited from accepting deposits, which is available at www.rbi.org.in → Sitemap → NBFC List → NBFCs who have been issued prohibitory orders, winding up petitions filed and legal cases under Chapter IIIB, IIIC and others.
  4. NBFCs have to prominently display the Certificate of Registration (CoR) issued by the Reserve Bank on its site. This certificate should also reflect that the NBFC has been specifically authorized by RBI to accept deposits. Depositors must scrutinize the certificate to ensure that the NBFC is authorized to accept deposits.
  • The maximum interest rate that an NBFC can pay to a depositor should not exceed 12.5%. The Reserve Bank keeps altering the interest rates depending on the macro-economic environment. The Reserve Bank publishes the change in the interest rates on www.rbi.org.in → Sitemap → NBFC List → FAQs.
  1. The depositor must insist on a proper receipt for every amount of deposit placed with the company. The receipt should be duly signed by an officer authorized by the company and should state the date of the deposit, the name of the depositor, the amount in words and figures, rate of interest payable, maturity date and amount.
  2. In the case of brokers/agents etc collecting public deposits on behalf of NBFCs, the depositors should satisfy themselves that the brokers/agents are duly authorized by the NBFC.
  3. The depositor must bear in mind that public deposits are unsecured and Deposit Insurance facility is not available to depositors of NBFCs.
  • The Reserve Bank of India does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.
  1. Does RBI guarantee the repayment of the deposits collected by NBFCs?
  2. No. The Reserve Bank does not guarantee repayment of deposits by NBFCs even though they may be authorized to collect deposits. As such, investors and depositors should take informed decisions while placing deposit with an NBFC.
  3. In case an NBFC defaults in repayment of deposit what course of action can be taken by depositors?
  4. If an NBFC defaults in repayment of deposit, the depositor can approach Company Law Board or Consumer Forum or file a civil suit in a court of law to recover the deposits. NBFCs are also advised to follow a grievance redress procedure as indicated in reply to question 57 below. Further, at the level of the State Government, the State Legislations on Protection of Interest of Depositors (in Financial Establishments) empowers the State Governments to take action even before the default takes place or complaints are received from depositors. If there is perpetration of an offence and if the intention is to defraud, the State Government can even attach properties.
  5. What is the role of Company Law Board in protecting the interest of depositors? How can one approach it?
  6. When an NBFC fails to repay any deposit or part thereof in accordance with the terms and conditions of such deposit, the Company Law Board (CLB) either on its own motion or on an application from the depositor, directs by order the Non-Banking Financial Company to make repayment of such deposit or part thereof forthwith or within such time and subject to such conditions as may be specified in the order. After making the payment, the company will need to file the compliance with the local office of the Reserve Bank of India.

As explained above, the depositor can approach CLB by mailing an application in prescribed form to the appropriate bench of the Company Law Board according to its territorial jurisdiction along with the prescribed fee.

Q Can you give the addresses of the various benches of the Company Law Board (CLB) indicating their respective jurisdiction?

  1. The details of addresses and territorial jurisdiction of the bench officers of CLB are as under:
S. No. Benches Jurisdiction Telephone No.
1. Company Law Board
Principal Bench
Paryavaran Bhawan
B-Block, 3rd Floor
C.G.O. Complex
Lodhi Road,New Delhi – 110 003
All States & Union Territories 011 – 24366126
2. Company Law Board
New Delhi Bench
Paryavaran Bhawan
B-Block, 3rd Floor
C.G.O. Complex Lodhi Road,New Delhi – 110 003
States of Delhi, Haryana, Himachal Pradesh, Jammu & Kashmir, Punjab, Rajasthan, Uttar Pradesh, Uttarakhand and Union Territories of Chandigarh. 011 – 24363671,
011 – 24362324
3. Company Law Board
Kolkata Bench
5, Esplande Row(West)
Kolkata – 700 001
States of Arunachal Pradesh, Assam, Bihar, Manipur, Meghalaya, Nagaland, Orissa, Sikkim, Tripura, West Bengal, Jharkhand and Union Territories of Andaman and Nicobar Island and Mizoram. 033 – 22486330
4. Company Law Board
Mumbai Bench
N.T.C. House, 2ND Floor,
15 Narottam Morarjee Marg,
Ballard Estate,
Mumbai – 400 038
States of Goa, Gujarat, Madhya Pradesh, Maharashtra, Chhattisgarh and (Union Territories of Dadra and Nagar Haveli and Damman and Diu) 022 – 22619636
5. Company Law Board,
Chennai Bench
Corporate Bhawan (UTI Building),
3rd Floor, No. 29 Rajaji Salari,
Chennai – 600001.
States of Andhra Pradesh, Karnataka, Kerala, Tamil Nadu and Union Territories of Pondicherry and Lakshadweep Island. 044 – 25262791
  1. We hear that in a number of cases Official Liquidators have been appointed on the defaulting NBFCs. What is the procedure adopted by the Official Liquidator?
  2. An Official Liquidator is appointed by the court after giving the company reasonable opportunity of being heard in a winding up petition. The liquidator performs the duties of winding up of the company and such duties in reference thereto as the court may impose. Where the court has appointed an official liquidator or provisional liquidator, he becomes custodian of the property of the company and runs day-to-day affairs of the company. He has to draw up a statement of affairs of the company in prescribed form containing particulars of assets of the company, its debts and liabilities, names/residences/occupations of its creditors, the debts due to the company and such other information as may be prescribed. The scheme is drawn up by the liquidator and same is put up to the court for approval. The liquidator realizes the assets of the company and arranges to repay the creditors according to the scheme approved by the court. The liquidator generally inserts advertisement in the newspaper inviting claims from depositors/investors in compliance with court orders. Therefore, the investors/depositors should file the claims within due time as per such notices of the liquidator. The Reserve Bank also provides assistance to the depositors in furnishing addresses of the official liquidator.
  3. The Consumer Court plays useful role in attending to depositors problems. Can one approach Consumer Forum, Civil Court, CLB simultaneously?
  4. Yes, a depositor can approach any or all of the redressal authorities i.e consumer forum, court or CLB.
  5. Is there an Ombudsman for hearing complaints against NBFCs or Does RBI have any grievance redressal mechanism in place for NBFCs?
  6. No, there is no Ombudsman for hearing complaints against NBFCs. However, in respect of credit card operations of an NBFC, which is a subsidiary of a bank, if a complainant does not get satisfactory response from the NBFC within a maximum period of thirty (30) days from the date of lodging the complaint, the customer will have the option to approach the Office of the concerned Banking Ombudsman for redressal of his grievance/s.

If complaints or grievances against the NBFCs are submitted to the nearest office of the Reserve Bank of India, the same are taken up with the NBFC concerned to facilitate resolution of the grievance/complaint. Further, all NBFCs have in place a Grievance Redressal Officer, whose name and contact details have to be mandatorily displayed in the premises of the NBFCs. The grievance can be taken up with the Grievance Redressal Officer. In case the complainant is not satisfied with the settlement of the complaint by the Grievance Redressal Officer of the NBFC, he/she may approach the nearest office of the Reserve Bank of India with the complaint. The details of the Office of the Reserve Bank has also to be mandatorily displayed in the premises of the NBFC.

  1. Companies registered with MCA but not registered with RBI as NBFCs also sometimes default in repayment of deposit/ amounts invested with them? What is the recourse available to the investors in such an event? Does RBI have any role to play in such cases?
  2. Companies registered with MCA but not required to be registered with RBI as NBFC are not under the regulatory domain of RBI. Whenever RBI receives any such complaints about the companies registered with MCA but not registered with RBI as NBFCs, it forwards the complaints to the Registrar of Companies (ROC) of the respective state for any action. The complainants are advised that the complaints relating to irregularities of such companies should be promptly lodged with ROC concerned for initiating corrective action. However, in case it comes to the knowledge of RBI those companies were required to be registered with the RBI, but have not done so and have accepted deposits as defined under RBI Act, such action as is deemed necessary under the provisions of the RBI Act will be taken.
  3. The NBFCs have been made liable to pay interest on the overdue matured deposits if the company has not been able to repay the matured public deposits on receipt of a claim from the depositor. Please elaborate the provisions.
  4. As per Reserve Bank’s Directions, overdue interest is payable to the depositors in case the company has delayed the repayment of matured deposits, and such interest is payable from the date of receipt of such claim by the company or the date of maturity of the deposit whichever is later, till the date of actual payment. If the depositor has lodged his claim after the date of maturity, the company would be liable to pay interest for the period from the date of claim till the date of repayment. For the period between the date of maturity and the date of claim it is the discretion of the company to pay interest. In cases where NBFCs are required to freeze the term deposits of customer based on the orders of the enforcement authorities or the deposit receipts are seized by the enforcement authorities, they shall follow the procedure as given below:
  5. request letter may be obtained from the customer on maturity. While obtaining the request letter from the depositor for renewal, NBFCs should also advise him to indicate the term for which the deposit is to be renewed. In case the depositor does not exercise his option of choosing the term for renewal, NBFCs may renew the same for a term equal to the original term.
  6. No new receipt is required to be issued. However, suitable note may be made regarding renewal in the deposit ledger.
  • Renewal of deposit may be advised by registered letter / speed post / courier service to the concerned Government department under advice to the depositor. In the advice to the depositor, the rate of interest at which the deposit is renewed should also be mentioned.
  1. If overdue period does not exceed 14 days on the date of receipt of the request letter, renewal may be done from the date of maturity. If it exceeds 14 days, NBFCs may pay interest for the overdue period as per the policy adopted by them, and keep it in a separate interest free sub-account which should be released when the original fixed deposit is released.

However the final repayment of the principal and the interest so accrued should be done only after the clearance regarding the same is obtained by the NBFCs from the respective Government agencies.

  1. Can a company pre-pay its public deposits?
  2. An NBFC accepts deposits under a mutual contract with its depositors. In case a depositor requests for pre-mature payment, Reserve Bank of India has prescribed Regulations for such an eventuality in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 wherein it is specified that NBFCs cannot grant any loan against a public deposit or make premature repayment of a public deposit within a period of three months (lock-in period) from the date of its acceptance. However, in the event of death of a depositor, the company may, even within the lock-in period, repay the deposit at the request of the joint holders with survivor clause / nominee / legal heir only against submission of relevant proof, to the satisfaction of the company

An NBFC, (which is not a problem company) subject to above provisions, may permit after the lock–in period, premature repayment of a public deposit at its sole discretion, at the rate of interest prescribed by the Bank

A problem NBFC is prohibited from making premature repayment of any deposits or granting any loan against public deposit/deposits, as the case may be. The prohibition shall not, however, apply in the case of death of depositor or repayment of tiny deposits i.e. up to ₹ 10000/- subject to lock in period of 3 months in the latter case.

  1. What is the liquid assets requirement for the deposit taking companies? Where are these assets kept? Do depositors have any claims on them?
  2. In terms of Section 45-IB of the RBI Act, 1934, the minimum level of liquid assets to be maintained by NBFCs is 15 per cent of public deposits outstanding as on the last working day of the second preceding quarter. Of the 15%, NBFCs are required to invest not less than ten percent in approved securities and the remaining 5% can be in unencumbered term deposits with any scheduled commercial bank. Thus, the liquid assets may consist of Government securities, Government guaranteed bonds and term deposits with any scheduled commercial bank.

The investment in Government securities should be in dematerialised form which can be maintained in Constituents’ Subsidiary General Ledger (CSGL) Account with a scheduled commercial bank (SCB) / Stock Holding Corporation of India Limited (SHICL). In case of Government guaranteed bonds the same may be kept in dematerialised form with SCB/SHCIL or in a dematerialised account with depositories [National Securities Depository Ltd. (NSDL)/Central Depository Services (India) Ltd. (CDSL)] through a depository participant registered with Securities & Exchange Board of India (SEBI). However in case there are Government bonds which are in physical form the same may be kept in safe custody of SCB/SHCIL.

NBFCs have been directed to maintain the mandated liquid asset securities in a dematerialised form with the entities stated above at a place where the registered office of the company is situated. However, if an NBFC intends to entrust the securities at a place other than the place at which its registered office is located, it may do so after obtaining the permission of RBI in writing. It may be noted that liquid assets in approved securities will have to be maintained in dematerialised form only. The liquid assets maintained as above are to be utilised for payment of claims of depositors. However, deposits being unsecured in nature, depositors do not have direct claim on liquid assets.

  1. What does RBI do to protect the interest of NBFC depositors?
  2. RBI has issued detailed regulations on deposit acceptance, including the quantum of deposits that can be collected, mandatory credit rating, mandatory maintenance of liquid assets for repayment to depositors, manner of maintenance of its deposit books, prudential regulations including maintenance of adequate capital, limitations on exposures, and inspection of the NBFCs, besides others, to ensure that the NBFCs function on sound lines. If the Bank observes through its inspection or audit of any NBFC or through complaints or through market intelligence, that a certain NBFC is not complying with RBI directions, it may prohibit the NBFC from accepting further deposits and prohibit it from selling its assets. In addition, if the depositor has complained to the Company Law Board (CLB) which has ordered repayment and the NBFC has not complied with the CLB order, RBI can initiate prosecution of the NBFC, including criminal action and winding up of the company.

More importantly, RBI initiates prompt action, including imposing penalties and taking legal action against companies which are found to be violating RBI’s instructions/norms on basis of Market Intelligence reports, complaints, exception reports from statutory auditors of the companies, information received through SLCC meetings, etc. The Reserve Bank immediately shares such information with all the financial sector regulators and enforcement agencies in the State Level Coordination Committee Meetings.

As a premier public policy institution, as part of its public policy measure, the Reserve Bank of India has been in the forefront in taking several initiatives to create awareness among the general public on the need to be careful while investing their hard earned money. The initiatives include issue of cautionary notices in print media and distribution of informative and educative brochures/pamphlets and close interaction with the public during awareness/outreach programs, Townhall events, participation in State Government sponsored trade fairs and exhibitions. At times, it even requests newspapers with large circulation (English and vernacular) to desist from accepting advertisements from unincorporated entities seeking deposits.

  1. Who rates deposit taking NBFCs for acceptance of deposit?
  2. NBFCs may get itself rated by any of the six rating agencies namely, CRISIL, CARE, ICRA, FITCH Ratings India Pvt. Ltd, Brickwork Ratings India Pvt. Ltd. and SMERA.
  3. What are the symbols of minimum investment grade rating of different companies? When a company’s rating is downgraded, does it have to bring down its level of public deposits immediately or over a period of time?
  4. The symbols of minimum investment grade rating of the Credit rating agencies are:
Name of rating agencies Nomenclature of minimum investment
grade credit rating (MIGR)
CRISIL FA- (FA MINUS)
ICRA MA- (MA MINUS)
CARE CARE BBB (FD)
FITCH Ratings India Pvt. Ltd.
SMERA
tA-(ind)(FD)
SMERA A
Brickwork Ratings India Pvt. Ltd. BWR FBBB

It may be added that A- is not equivalent to A, AA- is not equivalent to AA and AAA- is not equivalent to AAA.

However, if rating of an NBFC is downgraded to below minimum investment grade rating, it has to stop accepting public deposits, report the position within fifteen working days to the RBI and bring within three years from the date of such downgrading of credit rating, the amount of public deposit to nil. With the introduction of revised regulatory framework in November 2014 deposit taking NBFCs have to mandatorily get investment grade credit rating for being eligible to accept public deposits.

  1. What is the purpose of enacting Protection of Interest of Depositors in Financial Establishments Act by the State Governments?
  2. The purpose of enacting this law is to protect the interests of the depositors. The provisions of RBI Act are directed towards enabling RBI to issue prudential regulations that make the financial entities function on sound lines. RBI is a civil body and the RBI act is a civil Act. Both do not have specific provisions to effect recovery by attachment and sale of assets of the defaulting companies, entities or their officials. It is the State government machinery which can effectively do this. The Protection of Interest of Depositors in Financial Establishments Acts, confers adequate powers on the State Governments to attach and sell assets of the defaulting companies, entities and their officials.
  3. Will the passage of the Protection of Interest of Depositors in Financial Establishments by the State Governments help in nailing unincorporated entities and companies from unauthorisedly accepting deposits?
  4. Yes, to a large extent. The Act makes offences, such as, unauthorized acceptance of deposits by any entity, firm or company a cognizable offence, that is entities that are indulging in unauthorized deposit acceptance or unlawful financial activities can be immediately imprisoned and prosecuted. Under the Act, the State Governments have been given vast powers to attach the property of such entities, dispose them off under the orders of special courts and distribute the proceeds to the depositors. The widespread State Government / State Police machinery is best positioned to take quick action against the culprits. The Reserve Bank has, therefore, been urging all the State Governments to pass the legislation on Protection of Interest of Depositors in Financial Establishment Act.
  5. Still there are cases of unscrupulous financial entities cheating public time and again. How does RBI plan to strengthen its surveillance on unauthorized acceptance of deposits/unauthorized conduct of NBFI business by companies?
  6. The Reserve Bank is strengthening its market intelligence function in various Regional Offices and is constantly examining the financials of companies, references for which have been received through market intelligence or complaints to the Reserve Bank. In this, context, members of public can contribute a great deal by being vigilant and lodging a complaint immediately if they come across any financial entity that contravenes the RBI Act. For example, if they are accepting deposits unauthorisedly and/conducting NBFC activities without obtaining due permission from the RBI. More importantly, these entities will not be able to function if members of public start investing wisely. Members of the public must know that high returns on investments will also have high risks. And there can be no assured return for speculative activities. Before investing the public must ensure that the entity they are investing in is a regulated entity with one of the financial sector regulators.
  7. In terms of para 7.1 of the revised regulatory framework issued vide CC No. 002 dated November 10, 2014, total assets of NBFCs in a group including deposit taking NBFCs, if any, will be aggregated to determine if such consolidation falls within the asset sizes of the two categories viz., NBFCs-ND (those with assets of less than ₹ 500 crore) and NBFCs-ND-SI (those with assets of ₹ 500 crore and above). Regulations as applicable to the two categories will be applicable to each of the NBFC-ND within the group. Will this aggregation of assets apply to exempted category of CICs in the group?
  8. No, the group requires to aggregate total assets of only those NBFCs which have been granted Certificate of Registration by the Bank. However, it must be ensured that the capital of the exempted category of CIC has not come, directly or indirectly, from an entity/ group company which has accessed public funds.
  9. Is prior written approval required in cases of merger of an NBFC ‘A’, with another NBFC/ entity ‘B’?
  10. In this case prior written approval of the Reserve Bank is to be obtained by ‘A’. Where ‘B’ is an NBFC, as a result of merger if there is change in shareholding pattern of paid up equity capital of ‘B’ by 26% or more, prior written approval of the Reserve Bank is required. If ‘B’ is not an NBFC but is likely to meet PBC post-merger, it would also need to approach the Reserve Bank for prior written approval as well as registration as an NBFC.
  11. Is prior written approval required in cases of merger of an entity (not an NBFC) with an NBFC?
  12. Where a non-NBFC mergers with an NBFC, prior written approval of the Reserve Bank would be required if such a merger satisfies any one or both the conditions viz., (i) any change in the shareholding of the NBFC consequent on the merger which would result change in shareholding pattern of 26 per cent or more of the paid up equity capital of the NBFC (ii) any change in the management of the NBFC which would result in change in more than 30 per cent of the directors, excluding independent directors.
  13. Is prior written approval required in cases of amalgamation of an NBFC ‘A’, with another NBFC/ entity ‘B’?

A. The NBFC/s being amalgamated will require to obtain prior written approval of the Reserve Bank.

* NBFC is a financial Institution that is into Lending or Investment or collecting monies under any scheme or arrangement but does not include any institutions which carry on its principal business as agriculture activity, industrial activity, trading and purchase or sale of immovable properties. A company that carries on the business of accepting deposits as its principal business is also a NBFC.

What are the financial activities of NBFCs?

A company is deemed to be an NBFC if its primary business is “Financial Activity”. Now, the question that arises is “When can it be said that a company’s principal business is financial activity?”

Financial activity is said to be the principal business of a company if the company’s financial assets form more than 50% of its total assets, and the income from the financial assets account for more than 50% of its total income. This test is commonly called the 50-50 test and is used to determine if a company is engaged in financial business or not. A company which fulfils both these criteria can then be registered as an NBFC by RBI or other regulatory bodies.

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  • January 20, 2017