NBFC

Legal Compliance and Regulations for NBFC Registration

A non-banking financial company is a registered company that is engaged in providing loans and advances to people who are not eligible to obtain loans from other traditional banks. Legal compliance and regulations for NBFC registration are mandatory requirements that every company that is willing to run an NBFC business must comply with to stay relevant in the market. The Reserve Bank of India is the concerned authority that regulates the legal compliance and regulations for NBFC registration. With the constantly changing landscape of the banking industry, RBI has implemented stringent legal compliance and regulations for NBFC registration to monitor the irregularities and multiple loopholes in the industry operating an NBFC banking business. One of the major objectives behind RBI’s implementation of strong legal compliance and regulations for NBFC is to maintain and enhance transparency and the protection of investors in the NBFC banking sector. However, the Reserve Bank of India, from time to time, posts a circulation on their official websites on various guidelines or legal compliance and regulations for NBFC registration.

In the financial sector, NBFC banks are important entities. Non-banking financial institutions need to follow the legal compliance and regulations for NBFC registration according to the RBI guidelines to operate legally in India. This legal compliance and regulations for NBFC help such banking businesses to better function and to maintain transparency in the banking business operations.

Essential NBFC Compliance Checklist

In India, NBFC banks play a pivotal position in the financial landscape, weaving a web of crucial services that fuel the economy of the nation. These NBFCs, as banking institutions, are engaged in the business of extending service to the public by offering facilities like credit, investments, insurance, etc. Nonetheless, like any other financial institution, NBFC banks also find themselves bound by an array of legal compliance and regulations for the NBFC banking business. These requirements of legal compliance and regulations for NBFC serve as a guardian, safeguarding the financial industry fabric and securing the consumer’s interests and experiences.

Some of the essential guidelines for NBFC registration and compliance are as follows:

1. An NBFC bank must maintain regulatory standards by maintaining sufficient capital against their assets and liabilities 

2. RBI has made it mandatory to enhance the financial stability of an NBFC bank by making it mandatory for an NBFC bank to maintain sufficient liquid assets.

3. NBFC bank must be registered under the Companies Act, 2013, for obtaining a registration in the NBFC banking business.

4. NBFC banks must have a minimum net-owned fund of 10 crore, according to the recent RBI master circular.

5. NBFCs must comply with the RBI guidelines on the submission of returns by deposit-taking NBFCs. In addition to that NBFC also needs to maintain an audited balance sheet and auditors report accepting public deposits within a stipulated time frame.

6. NBFC banks must also establish customers’ identities through KYC or Know Your Customer policies to prevent money laundering and various other illegal activities. NBFC Regulatory Framework

NBFC Registration Process Requirements

NBFC banks, to operate banking business, must obtain a mandatory registration from RBI or the Reserve Bank of India. RBI is the concerned authority that regulates and monitors the function of NBFC banking business in India, ensuring transparency is maintained to protect the interests of customers and investors. In addition, the legal compliance and regulations for NBFC registration must be looked into by the respective NBFC banks hand-to-hand to stay relevant in the industry and avoid any penalties and legal liabilities. Given below are the NBFC registration procedures:

Eligibility Criteria

Any company that is willing to run an NBFC banking business must ensure that it is a registered company according to the Companies Act 2013. Further, such a Company must have a minimum net owned fund of Rs.10 crore to be eligible for obtaining an NBFC registration from the RBI or Reserve Bank of India. However, such a company must not carry any business other than a NBFC.

Application Process

RBI as the concerned authority is responsible for accepting the application for the NBFC registration. Therefore, a company must fill out an application before the RBIs nearest regional office. Such application must be processed according to the guidelines provided by the RBI along with mandatory documents to be attached and fees to be deposited before the RBI.

Document Requirements

Some of the major documents to be submitted by the company along with the NBFC registration application form are a certificate of company’s incorporation, memorandum of articles (MoA), details of directors and shareholders, audited financial statements for the last three years, and the company’s business plan, etc.

What Are NBFC Company Registration Prudential Norms

NBFC banks must comply with the prudential norms prescribed by the Reserve Bank of India. However, these norms are designed to ensure a NBFC’s financial stability to protect the interests of depositors and investors. Given below are some of the major key prudential norms for legal compliance and regulations for NBFC registration.

Capital adequacy requirements

According to the RBI guidelines, NBFC banks must maintain a minimum capital adequacy ratio of 15%. This capital adequacy ratio is, however, calculated as per the ratio of the net owned funds to the risk-weighted assets.

Asset Classification and Provisioning

NBFC banks, based on their credit quality, have to make a classification on their assets. Reserve Bank of India, being the concerned authority, has prescribed statutory guidelines on such asset classification and various other provision requirements for each NBFC classification.

Credit rating

A credit rating has to be obtained by the NBFC financial institutions from a registered credit rating agency. This credit rating from the registered agency reflects the NBFC bank creditworthiness helping investors and customers to assess risk in investing in the NBFC.

What Are AML and KYC Regulations for NBFCs 

Both AML and KYC are important parts of legal compliance and regulations for NBFC to prevent the use of NBFC banking services for money laundering and terrorist financing. The KYC and AML regulation’s key requirements are as follows:

Customer Due Diligence

Customer due diligence has to be conducted by NBFC banks to every customer before opening a new account or while providing banking services to customers. This is a part of legal compliance and regulations for NBFC as it includes determining and verifying the customer identity and assessment of the potential risk related to the customer profile.

Risk Categorization of Customers

NBFC with the help of the customer due diligence must make a segregation of the level of risk connected to the customer’s profile by making a classification on such risk levels as low, medium, or high-risk categories. However, every category of risk has a different level of due diligence.

Reporting Obligations

Reporting obligations are another important part of legal compliance and regulations for NBFC banks. The NBFC financial institution has to make a report on finding any suspicious transactions above a certain threshold to the FIU India or Financial Intelligence Unit.

What are the essential requirements for NBFC Compliance?

Generally, NBFC or Non-banking financial companies do not necessarily require a banking license, unlike traditional banks. However, NBFC banks have to adhere to compliance with the RBI (Reserve Bank of India); failing to do so will result in penalties, cancellation of licenses, and various other legal liabilities. Further, to avoid any non-compliance and discrepancies, the essential requirements for legal compliance and regulation for NBFC are given below.

Registration & Licensing

Firstly, for any company to operate as an NBFC must register itself with the apex institution i.e. RBI or Reserve Bank of India. Once the company is registered as a NBFC it will receive a certificate of Registration (CoR). However, after registration NBFC must comply with various norms and guidelines according to the RBI such as maintaining a minimum net owned fund (NOF).

Data Protection

Data protection is also important in compliance with NBFC policies and regulations. Every registered NBFC must take steps to ensure that the customer’s data is fully protected & secured.

Capital Adequacy

According to the RBI guidelines, non-banking financial companies must maintain a minimum capital ratio of not less than 15 % of their aggregate risk-weighted assets on balance sheet and also the risk-adjusted value of off-balance sheet times.

KYC & AML

Both KYC and AML form an important part of NBFC compliance in combating money laundering and various other illegal activities. Under this framework of Know Your Customer and Anti-money laundering, NBFC must take diligence to identify the customers, enquire the proper records, and report to the concerned authority on the detection of any suspicious activity.

NBFC Regulatory Framework

1. The NBFC regulatory framework is one of the major NBFC registration criteria, and the NBFC bank shall be divided into four layers, depending on its size, activity, and perceived riskiness. These four layers of NBFC are the base layer NBFC (NBFC-BL), middle layer NBFC (NBFC-ML), upper layer (NBFC-UL), and NBFC top layer (NBFC-TL).

2. The base layer NBFC consists of assets below Rs.1000/- Crore, peer to peer NBFC lending platform, Account Aggregator-NBFC, Non-operative financial holding company and NBFC not providing the service on sanctioning public funds and not having any interface customer.

3. The middle layer of NBFC consists of any asset size NBFC deposits, NBFC non-deposits with asset size of Rs 1000/- core and above, and NBFC dealing with Standalone Primary Dealers, Infrastructure Debt Funds, Core Investment Companies, Housing Finance Companies, Infrastructure Finance Companies.

4. NBFC registration criteria for the Upper layer NBFC is that NBFC banks are identified on a set of parameters and methodology as per the Reserve Bank of India. Any top ten NBFC based on the size of the asset will be considered as an upper layer regardless of any factor.

5. If the upper layer NBFC is at potential risk as per the Reserve Bank of India, these NBFC banks will be shifted to the NBFC top layer, which is generally empty.

Role OF Fair Practice Code In NBFC

The fair practice code is another important element under the legal compliance and regulations for NBFC financial institutions to follow to maintain fair and transparent business operations. Some of the common key objectives of the NBFC Fair Practice Code are:

Fair Practice Code Objective

The main objective behind the fair practice code is that NBFCs must ensure that their financial business operations are fair and transparent while dealing with customer services. This fair and practice code, however, aims to protect the customer’s interests and to promote good governance in the NBFC financial business operations.

Fair Practice Implementation Guidelines

Fair practice Implementation guidelines have been prescribed by the RBI. These guidelines under the RBI cover various aspects of the NBFC business operations like application for loans, appraisal, disbursement of loans, loan pricing, and various other redressals on customer grievances.

NBFC Regulatory Framework

1. The NBFC regulatory framework is one of the major NBFC registration criteria, and the NBFC bank shall be divided into four layers, depending on its size, activity, and perceived riskiness. These four layers of NBFC are the base layer NBFC (NBFC-BL), middle layer NBFC (NBFC-ML), upper layer (NBFC-UL), and NBFC top layer (NBFC-TL).

2. The base layer NBFC consists of assets below Rs.1000/- Crore, peer to peer NBFC lending platform, Account Aggregator-NBFC, Non-operative financial holding company and NBFC not providing the service on sanctioning public funds and not having any interface customer.

3. The middle layer of NBFC consists of any asset size NBFC deposits, NBFC non-deposits with asset size of Rs 1000/- core and above, and NBFC dealing with Standalone Primary Dealers, Infrastructure Debt Funds, Core Investment Companies, Housing Finance Companies, Infrastructure Finance Companies.

4. NBFC registration criteria for the Upper layer NBFC is that NBFC banks are identified on a set of parameters and methodology as per the Reserve Bank of India. Any top ten NBFC based on the size of the asset will be considered as an upper layer regardless of any factor.

5. If the upper layer NBFC is at potential risk as per the Reserve Bank of India, these NBFC banks will be shifted to the NBFC top layer, which is generally empty.

NBFC Audit Requirements and Financial Reporting

NBFC audit requirements and financial reporting are other very important elements of legal compliance and regulations for NBFC banking business operations. Some of the key requirements under audit and financial reporting are:

NBFC Returns

According to the RBI guidelines, NBFC financial institutions must prepare a return and report on the financial statements to the RBI at regular intervals. Such reports include monthly and annual returns on NBFC banking business capital adequacy, asset classification and provisioning, and deposit acceptance from the customers.

Statutory Audit

NBFC must conduct a statutory audit of their business account as part of the legal compliance and regulations for NBFC by a qualified auditor appointed by a company board of directors and also such auditor must be a member of the Institute of Chartered Accountants of India (ICAI).

Internal Audit

An internal audit has to be performed by the NBFC through a qualified auditor of their NBFC banking business operation to ensure compliance with the companies’ internal policies and procedures.

Challenges with Legal Compliance and Regulation In NBFC

It is indeed difficult to comply with legal compliance and regulations for NBFC in India due to various specific factors and challenges. Some of the common difficulties are as follows:

1. With the constantly changing business landscape, the NBFC regulatory framework in India is also evolving from time to time, making it challenging for NBFC companies to keep updated with such evolving changes. However, NBFC regulatory requirements are spread across multiple regulatory bodies like RBI, SEBI, Ministry of Corporate Affairs. The team responsible for legal compliance and regulations for NBFC must be well-versed and updated with the NBFC regulations and requirements of each of these regulatory bodies.

2. Due to the lack of clarity in the legal compliance and regulations for NBFC, it makes it difficult for NBFC financial institutions to ensure the compliance requirements. However, the RBI guidelines are open for interpretation, leading to confusion and ambiguity resulting company being unsure to comply with certain requirements.

3. A small and medium-sized NBFC financial company may face difficulties in complying with the RBI compliance and regulations for the NBFC banking business and it is indeed time-consuming, complex, and expensive to cover. Many NBFCs may find it difficult to afford such resources for meeting the legal compliance and regulations for NBFC.

4. This legal compliance and regulations for NBFC require attention to detail and accuracy. However, a human error may occur, leading to non-compliance despite the company having a robust compliance process in place. 

5. If NBFC companies are new to the banking business it is often seen that they lack an awareness of the compliance requirements. Such lack of awareness of legal compliance and regulations for NBFC leads to non-compliance and legal penalties. Therefore, companies must stay updated with such regulatory changes to align with the legal compliance and regulations of the NBFC.

6. NBFC regulatory compliance is different from other industry compliance requirements. Due to the non-uniformity in the regulation framework legal compliance and regulations for NBFC becomes indeed challenging. Thus, NBFC banking companies must have a complete understanding of the legal compliance and regulations for NBFC for the smooth functioning of the banking operations.

What Are the Advantages of NBFC Registration

Given below are the major benefits of NBFC registration in India

1. It provides easy eligibility criteria for meeting customers’ facilities for loans and credit.

2. NBFC registration allows a company to enter into the convenience of trading in market instruments.

3. NBFC registration also provides wealth management services such as managing stocks and shares portfolios.

4. Unlike a traditional bank, NBFC registration provides customers with easy access to apply for loans with not-so-complex rules and regulations.

5. NBFC banks are capable of underwriting shares, stocks, and other liabilities.

6. NBFC or non-banking financial companies’ registration also ensures 100% Foreign Direct Investment in the country.

7. With the advancement of technology, NBFC banks have also introduced various technologically advanced software and modules attracting a larger number of customers or audiences by providing an option to a customer for credit facilities or services.

8. NBFC banks like any other banks can now authorized to use the Securitization and Reconstruction of Financial Assets and Enforcement Security Interest Act to recover a debt amount from the borrowers. 

Reasons Behind Cancellation of NBFC Registration

Here are the reasons behind the cancellation of an NBFC registration:

1. If a NBFC company is operating the business without having a bank license. or without registration from RBI is granted to run NBFc financial services.

2. If NBFC bank is not able to maintain the required net owned fund.

3. If NBFC failed to operate or follow policies such as the fair practice code, recovery policy, and various grievance redressal policies.

4. If the NBFC bank fails to make a repayment of the deposits, the NBFC can lead to cancellation.

5. In case the NBFC bank is not carrying out NBFC financial business activities.

6. Failure of NBFC bank to submit a book of accounts to the concerned authority.

7. If the board of directions of an NBFC bank is not able to fulfil the requirements as per the RBI guidelines to run an NBFC business.

Conclusion

Non-banking financial companies have to comply with the legal compliance and regulations for NBFC registration according to the RBI guidelines, rules, and regulations. However, if an NBFC company does not comply with such legal compliance and regulations for NBFC registration and is still operating, the business will have to face heavy penalties and legal liabilities, and RBI has the authority to cancel the NBFC license. This requirement of compliance depends on the type of NBFC the company is operating. However, the most important and common compliance requirement that every NBFC banking sector must follow is to obtain a registration from RBI or the Reserve Bank of India.

Legal compliance and regulations for NBFC are necessary for maintaining a seamless functioning of NBFC banking services. Therefore, NBFCs must ensure that they have a robust compliance and regulation framework in place and that they always keep updated with the changes in the regulation framework by monitoring and tracing the RBI guidelines. By doing so, NBFC can secure its reputation from damage and ensure the overall financial stability of the company, thus protecting the depositors’ and investors’ interests.

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