Closure of branch by non-banking financial company (NBFC)

Swetha Dhinesh

25 May, 2023

The Reserve Bank of India (RBI) is crucial in regulating NBFC, including branch openings and closings. While NBFCs are free to decide when to close their branch offices, they are nonetheless required to follow the RBI’s regulatory standards. In order to maintain financial stability, customer protection, and compliance with relevant rules and regulations, the RBI closely monitors and controls how NBFCs operate. The RBI may evaluate the reason for closure of branch, the potential impact on customers, and the overall consequence for the NBFCs activities. The non-banking financial company, or NBFC, is a crucial industry in India. It accomplishes the task of securing appropriate economic financing. To ensure the expansion of financial institutions, the Reserve Bank of India (RBI)^[1] is the only entity in charge of monitoring and regulating NBFCs. The RBI’s decision to revoke the NBFC licence and closure of branch for failure to satisfy the Net Owned Funds (NOF) condition has resulted in a decline in the number of NBFCs over time.

Non-Banking Financial Companies

A non-bank financial company (NBFC) is a financial entity that engages in lending, investing, or collecting funds under any scheme or arrangement; it excludes institutions that conduct their primary operations in agriculture, trading, purchasing, or selling real estate. An NBFC is a business that operates primarily in the business of receiving deposits.

India is a financially diverse industry which is rapidly growing, with both new market entrants and established financial services companies experiencing significant development. The sector comprises commercial banks, insurance companies, non-banking financial companies, co-operatives, pension funds, mutual funds, and other smaller financial entities. 

Closure of branches

1. No non-banking financial company (NBFC) shall close its branch or office without first notifying the RBI ninety days prior to the proposed closure of branch and without first publishing such intention in one national-level newspaper and one vernacular newspaper in circulation in the relevant place, indicating therein the purpose for closure and arrangements being made to service depositors, etc.
2. Within seven days of the notice’s publication in the newspapers, a notification and a copy of the notice should be given to the regional office of the RBI, whose jurisdiction the company’s registered office is located.

Need for public notice of the closure of branches by NBFCs

Public notice is necessary in case of the closure of a branch by the NBFC. The following elements are necessary that the NBFC need to follow:

• It has been decided that the concerned NBFC should give at least three months’ public notice before the date of closure of branch for of any of its branches or offices.
• The concerned NBFC should give public notice in at least one leading national newspaper and a leading local regarding the closure of branch (covering the location of the branch/office). 
• It is done to ensure that an NBFC intending to close a particular branch or office gives proper notice to the depositors and adequate arrangements are made to service the deposits mobilised through such a branch or office.

Importance of Branch Office of NBFC

NBFC branch offices in India perform a number of crucial functions, such as:

• Geographic Reach: NBFCs operate throughout numerous Indian states and regions, and branch offices enable them to create a physical presence. This makes it easier for them to reach and interact with a larger consumer base and meet the financial requirements of people and companies located in various regions.
• Customer Service and Relationship Management: Branch offices make it easier for NBFCs to interact directly with customers, which enables them to offer specialised services, respond to questions and concerns from clients, and forge lasting bonds with them. Face-to-face communication aids in better understanding consumer demands and the provision of appropriate financial solutions. 
• Business Expansion: An NBFC’s expansion plan frequently includes opening branch offices. It enables them to grow their business and access new markets. NBFCs can diversify their portfolio and draw clients from a range of markets by developing a presence in other areas.
• Trust and Credibility: Branch offices help an NBFC’s overall credibility and trust, which is important for business. Customers are reassured by a company’s physical presence in the form of branch offices regarding the reliability and stability of the business. It fosters client confidence and motivates them to use the NBFC’s financial services.

However, the necessity for branch offices may differ based on each NBFC’s business strategy, target market, and strategic goals. While some NBFCs may emphasise building a vast network of branch offices, others may rely more heavily on digital channels and may have a more modest physical presence.

Reason for closure of branches

The closure of branch of an NBFC may occur for a number of reasons, including:

• NBFCs may go through strategic restructuring to improve their processes and streamline their business models. They may choose to close some branch offices as part of this process if they are not operating effectively or are not in line with their long-term aims and objectives.
• Due to the changes in the market condition, customer preference, or competition. The NBFC may decide to close a particular branch office if it is not producing enough business or is dealing with severe local competition.
• Closing of NBFC branch offices may also result from failure to comply with regulatory regulations or modifications to regulatory standards. The NBFC may opt to close a branch office if it struggles to follow the rules or fails to comply with regulatory requirements in order or avoid fines or reputational hazards. 

Conclusion

The decision by NBFCs for closure of branch is made to streamline operations, improve cost-efficiency, leverage digital channels, and ensure regulatory compliance. To better align their operations with their long-term objectives and increase their overall efficiency and competitiveness in the financial services sector, NBFCs have decided to close their branch offices strategically.

To ensure compliance and reduce any negative effects, it is crucial for NBFCs to adhere to the regulatory standards established by the RBI rigorously and to keep lines of communication open with the regulatory body throughout the closing process.

Read our Article: Returns by NBFC Having Overseas Investment