NBFC Failing To Repay Public Deposits Prohibited From Making Loans & Investments

Swetha Dhinesh

27 May, 2024

As a company registered under the RBI Act of 1934 and the Companies Act of 2013, the NBFC is governed by the Reserve Bank of India. NBFCs, which are not banks but do engage in lending activities, include providing advances, credit facilities, savings and investment products, money market trading, portfolio management, money transfers, and more. Deposit-taking NBFCs and Non-deposit taking NBFCs are the two categories of NBFCs related to deposits. This topic comes under the heading of deposit-taking NBFCs. In the case of non banking financial companies, there are often regulatory measures to protect depositor interests and prevent further financial risks if an NBFC fails to repay its public deposit commitments. One such measure is the NBFC’s ban on lending money and making investments. In this blog, we will discuss NBFC’s failure to repay public deposits prohibited from making loans and investments.

Deposits under the RBI Act

According to section 45 I(bb) of the Reserve Bank of India Act, 1934, deposit means:

• Amount raised through share capital; 
• Amount contributed as capital by business partners; 
• Money received from scheduled banks, cooperative banks, or other banking companies as defined in clause (c) of Section 5 of the Banking Regulation Act of 1949;
• any sum received from:
• The State Financial Corporation,
• Any financial institution listed in or covered by Section 6A of the Industrial Development Bank of India Act of 1964 or
• Any other institution that the Bank may designate in this regard; 
• Amounts Received in the Regular Course of Business by Way of 
• Security Deposit, 
• Dealership Deposit, 
• Earnest Money, or 
• Advance Against Orders for Goods, Properties, or Services;

• Any amount received from an Individual, a firm, or an association of individuals not being body corporate registered as per any enactment related to money lending in any state.
• Any money acquired through subscriptions for a chit. 

Regulation-39. Non-Banking Financial Companies Failing To Repay Public Deposits Are Prohibited From Making Loans and Investments

According to section 45QA (1) of the RBI Act, a non-banking financial company that has failed to repay any public deposit in whole or in part in accordance with the terms and conditions of such deposit is not permitted to make any investments, create any new assets, or extend any other forms of credit while the default is still in effect.

According to section 45QA (1) of the Reserve Bank of India Act, 1934¹, all deposits accepted by a non-banking financial company must be reimbursed in accordance with the terms and conditions of the deposit unless they are renewed.

Reason for This Regulation

As part of the regulation, it may be decided to ban the defaulting NBFC from making any more loans and investments. 

• This prohibition is put in place to stop the NBFC from engaging in further financial operations that would worsen its financial situation and endanger the interests of its depositors.
• By banning loans and investments, the NBFC hopes to protect the interests of the depositors who have given their money to the organization. It helps to ensure that the available resources are used to meet the existing deposit obligation by limiting the NBFC’s ability to make additional loans or investments. 
• In addition to the prohibition, regulatory authorities may start a settlement procedure to deal with the default and safeguard depositor interests. The precise actions performed depend on the seriousness of the default and the options permitted by the relevant laws. 

Regulation of Public Deposits of Nbfcs

Public deposits are prohibited for some NBFCs. Public deposits may only be accepted or held by parties with a particular authorization from the RBI and an investment-grade rating up to 1.5 times its net owned money. 

The regulation of non-banking financial companies specifically states the following:

• Consumers may receive interest rates of up to 12.5% from non-bank financial institutions. Every month, this interest could be paid or compounded.
• Non-Banking Financial Companies may accept or renew public deposits for a minimum of twelve months and a maximum of sixty months.
• They don’t accept deposits that are paid back immediately.
• There is no accessible deposit insurance.
• The RBI does not guarantee the return of deposits.

The RBI has strict regulations in place for non-banking financial companies. A minor error could lead to a hefty punishment or the license being suspended. 

Precautions to Be Taken By Depositors

When investing in NBFCs, the RBI warned clients to be cautious. The following items are listed in the RBI brochure for your consideration:

• Deposits from the public are uninsured.
• Always demand a proper receipt for any deposits you make to a bank, NBFC, or business.
• The depositor’s name, the rate of interest due, the amount in words and figures, the maturity date, and the amount must all be included on the receipt. It must also be dated. It must be signed by an officer authorized by the company as well.
• The Reserve Bank of India expressly disclaims all liability and responsibility for the firm’s current financial condition, representations, the accuracy of any claims or assertions made by the company, and the prompt payment of deposits and satisfaction of liabilities.
• Verify that any brokers, agents, etc., who collect public deposits on NBFCs’ behalf have received the necessary approval from the corresponding NBFC.
• NBFC depositors should be aware that they are not eligible for the Deposit Insurance facility.
• Make that the NBFC is not on the company’s list of NBFCs that are not allowed to receive deposits by checking if its name is on the list of deposit-taking NBFCs that are allowed to accept deposits, which is available at https://rbi.org.in.
• NBFCs are required to publicly display the COR (Certificate of Registration) issued by the Reserve Bank on their website or in their office. Additionally, it must be stated in this document that the NBFC has specific authorization from the RBI to accept deposits. Examine the certificate carefully to confirm whether the NBFC can receive deposits.

Conclusion

Regulatory actions are often put in place if a non-banking financial business doesn’t pay back its obligations related to public deposits to safeguard depositor interests and reduce other risks. The restriction on new loans and investments by the defaulting NBFC is one common regulatory response. The regulatory framework and intervention strategies are intended to protect depositor interests and sustain financial system stability.

FAQs:-

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

1. https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIAM_230609.pdf