NBFC

Intimation of maturity of deposits to depositors by NBFC

The Reserve Bank of India (the Bank) issued Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016, after determining that it was necessary in the public interest and in order to enable the Bank to regulate the credit system to benefit the nation.

On their website or in their office, NBFCs must prominently display the (COR) Certificate of Registration granted by the Reserve Bank. This certificate should also state that the NBFC has been expressly approved to receive deposits by RBI. According to RBI guidelines, NBFCs that accept public deposits are required to abide by specific regulations regarding the deposits that depositors make available to them. One of these regulations requires NBFCs to inform depositors of the deposit’s maturity date, which this blog discusses.

Deposit under RBI Act, 1934

The term deposit is defined under section 45-I (bb) of the Reserve Bank of India Act, 1934¹ in the following way:

Deposit includes and will always be considered to have included any receipt of money in the form of a loan, deposit, or other form but does not include-

1. Amount raised through share capital
2. Amounts contributed as capital by the firm’s partners.
3. Amounts received from a scheduled bank, a cooperative bank, or any other banking company as defined in section 5 clause [c] of the Banking Regulation Act, 1949.
4. Any amount received from
   1. A State Financial Corporation
   2. Any financial institution listed in or under section 6A of the Industrial Development Bank of India Act, 1964
   3. Any other institution that is specified by the Reserve Bank from time to time.
5. Any amount received in the regular course of business in the form of:
   1. A security deposit
   2. Dealership deposit
   3. Earnest money
   4. An advance against orders for goods, properties, or services.
6. Sums received from individuals, firms, or associations of individuals who are not body corporate and who are registered under any money lending law currently in effect in any State; and 
7. Sums received in the form of subscription payments in respect of chit.
8. For the purposes of this section, any credit offered by a seller to a buyer with the sale of any property (whether movable or immovable) must not be considered a deposit.
9. Suppose a cooperative society’s members or shareholders are nominal or associate members, by whatever name they are called, who do not have full voting rights in the society’s meetings. In that case, the amounts accepted from those individuals will be considered deposits for the purposes of this clause, excluding amounts received as share capital.

Deposit under the Companies Act

Regardless of the method, a company may receive funds; however, some types of funds may be excluded as decided in agreement with the Reserve Bank of India.

Regulation of NBFC Public Deposits

• All NBFCs are not permitted to receive public deposits. Only those having a specific authorization from the RBI and an investment-grade rating up to 1.5 times it’s net owned fund may accept or hold public deposits. The following are specifics of the non-banking financial company’s regulation:
• Non-Banking Financial Companies may offer consumers an interest rate of up to 12.5%. This interest could be paid or compounded every month.
• Non-Banking Financial Companies may accept or renew public deposits for a minimum of twelve months and a maximum of sixty months.
• They do not take deposits that are repaid on demand.
• No deposit insurance is available.
• The RBI does not ensure that deposits will be repaid.

Strict guidelines are in place by the RBI for non-banking financial institutions. A small mistake could result in a harsh penalty or the license being suspended. 

Notifying depositors of the maturity of their deposits

The non-banking financial company is required to inform the depositor of the deposit’s maturity and other pertinent information at least two months prior to the date of maturity of the deposit.

• Depositors must be informed by Non-Banking Financial Companies when their deposits are about to mature. Depending on the rules established by the regulatory body, the Reserve Bank of India, the particular parameters for intimation of maturity may change.
• NBFC must notify depositors of the maturity of their deposits in a timely manner, and this notification must occur well before two months from the maturity date. The regulatory authority may provide a precise timetable for intimation, and NBFCs must make sure that these deadlines are followed. 
• In case the depositor fails to receive the intimation, the NBFCs may issue a reminder notification to ensure the depositor is aware of the maturity and can take the appropriate steps. 
• NBFCs are required to abide by regulatory requirements for notifying depositors of a maturity date. For the purposes of regulatory audits, they must preserve documentation of all notifications given to depositors as well as proof of compliance.

Public deposit renewal

Suppose a non-banking financial institution allows an existing depositor to extend their deposit before it matures to profit from a higher interest rate. In that case, they must pay the depositor the higher rate of interest provided that, among other things:

In accordance with the other guidelines, the deposit is renewed in the following ways: 

• For a period longer than the remaining time under the original contract; and 
• The interest on the deposit’s expired period is reduced by one percentage point from the rate the company would have normally paid had the deposit been accepted for the duration it had run. Any interest that was already paid that was in excess of the reduced rate is recovered or adjusted.

Reporting Requirements

According to regulation 41 of the Master Direction Non-Banking Financial Companies Acceptance of Public Deposit (Reserve Bank) Direction, 2016, the non-banking finance company shall comply with the reporting requirements for NBFC-D as prescribed by the Department of Non-Banking Supervision.

General Reason for the Prior Intimation

NBFCs should notify the depositors well in advance of their maturity for a number of reasons:

• By informing depositors in advance when their deposits are due to mature, the NBFC can ensure they are aware of the upcoming maturity date. That aids depositors in making well-informed decisions about the renewal or reinvestment of their deposits as well as financial planning.
• Before choosing whether to renew the deposit or use the maturity funds for other purposes, depositors may require some time to consider alternative investment ideas or review their financial needs.
• It enables depositors to start the withdrawal procedure if they want to redeem their deposits when they mature. NBFCs help depositors manage their money in a smooth and hassle-free manner.
• Early intimation of maturity is a crucial component of client relationship management for NBFCs. The relationship between the NBFC and its depositors is strengthened through effective communication and increased customer satisfaction.

Conclusion

Overall, NBFCs’ advance notice of maturity is advantageous to both the NBFC and the depositors. It enables informed decisions on the part of depositors, ensures adherence to regulatory requirements, and supports efficient relationships with the NBFC and the depositor.

Read our Article:Restriction on acceptance of public deposits by NBFC

1. https://www.rbi.org.in/Scripts/FAQView.aspx?Id=92