NBFC

NBFC Registration for Protection of Interest of Depositors

A non-banking financial institution is an organisation whose principal activity is to accept deposits under any scheme or arrangement, whether they are made in a single payment, a series of installments through contributions, or in any other method. 

In the exercise of the authority granted by of the Reserve Bank of India Act (RBI), 1934^[1] under section 45JA, the Reserve Bank of India (RBI) amended the (NBFCs) Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 in order to regulate the nation’s financial system to its benefit and in the public interest. 

NBFC Overview 

A Non-Banking Financial Company, or NBFC, is a business registered under the 2013 Companies Act that specialises in loans and advances as well as the purchase of bonds, securities, shares, bonds, or stocks issued by the Government or Local Authorities or other marketable securities like those used in leasing, insurance, hire-purchase, and chit transactions.  

However, it excludes any institution whose primary business is that of agricultural activity, industrial activity, or any other activity related to any services and sale/purchase/construction of the immovable property.  

NBFCs in India lacks the required banking licences as Commercial Banks (after obtaining NBFC licenses from RBI) offer supportive & helpful services to the general public’s depositors, borrowers, and investors in specific business sectors. 

The addition of “paragraph 9C” to the Directions, which deals with the submission of a certificate from the Statutory Auditor to the Bank, was a significant change made by this alteration. Every NBFC is now required to produce a Certificate from its Statutory Auditor attesting that it is operating as a non-bank financial institution, necessitating the need for it to possess a Certificate of NBFC Registration in accordance with Section 45-IA of the RBI Act.  

The Regional Office, on whose jurisdiction the NBFC is registered under the Department of Non-Banking Supervision, may request a certificate from the Statutory Auditor in this respect regarding the company’s status as of the end of the financial year no later than June 30 of each year. 

Regulations in the interest of the depositors at the time of investment: 

The following are some of the requirements that must be met before NBFCs can accept deposits: 

• Public deposits may be accepted or renewed by NBFCs for a minimum of 12 months and a maximum of 60 months. Deposits that are repaid on demand are not accepted. 
• NBFCs are not permitted to offer interest rates over the ceiling set by the RBI from time to time. The current ceiling is 12.5% annually. The interest may be accrued or paid at intervals like monthly intervals. 
• NBFCs are not permitted to give depositors gifts, incentives, or any other kind of additional advantage. 
• NBFCs should have a minimum investment-grade credit rating, with few exceptions. 
• Deposits with NBFCs are not covered by insurance. 
• The RBI does not guarantee NBFCs’ return of deposits. 
• The Application Form produced by the business seeking deposits contains a number of required company disclosures. 

Benefits of NBFC Registration 

The benefits of NBFC Registration in India are: 

• Saves Time and Money: In contrast to an NBFC, the process of creating an NBFC is simpler than it is for small banks. Opening a bank does not require the same capital, time, or expense level, whereas the same is not in the case of an NBFC. To obtain NBFC Registration in India, one requires the aid of a competent NBFC consultant with previous experience. 
• Quick Loan Recovery: NBFCs operate systematically and provide specialised loan packages with manageable payback schedules. The technique benefits borrowers because they may quickly repay the loan within the allotted time. 
• Economic Growth: For their financial needs, businesses and individuals are searching for a simple and reliable source of credit. NBFCs serve an unserved market by offering affordable and safe loan facilities for personal and commercial credit needs. As a result, by giving MSMEs, independent contractors, and individuals financial freedom, NBFCs have aided in the expansion of the nation’s economy. 
• Offer Various Options: Due to technology development, NBFCs are now offering multiple options to reach a large audience more quickly. Non-Banking Financial Corporation offers both large and small businesses a variety of ways to access available credit facilities. 
• Permitted FDI: FDI (Foreign Direct Investment) is permitted under NBFCs up to 100%, which is another fantastic benefit of NBFC registration. The biggest drivers of new financing in the nation are non-bank financial institutions. Also, compared to banks, the funding process is quicker and simpler. 
• Offer Loans to Those with Low Credit Scores: Generally, banks look at credit scores first and reject a loan application if the applicant has a low credit score. However, NBFCs offer loans to borrowers with lower credit scores. 
• Detailed Rules and Compliance: It serves the best authenticity and trust in society because of the robust regulatory and compliance system. 

RBI’s initiatives to protect the interest of NBFC depositors 

To ensure that NBFCs function on time, the RBI has issued comprehensive regulations on deposit acceptance, including the maximum amount of deposits that can be collected, mandatory maintenance of liquid assets for repayment to depositors, mandatory credit rating, methods of maintaining its deposit books, and inspection of the NBFCs, among other things. Suppose the Bank determines that a particular NBFC is not following RBI instructions through its inspection or audit of the NBFC, through complaints received from customers, or through market intelligence.  

In that case, it may prohibit the NBFC from accepting new deposits and selling its assets. Additionally, suppose the depositor complained to the National Company Law Tribunal (NCLT), which ordered repayment, and the NBFC disobeyed the NCLT order. In that case, RBI may start legal proceedings against the NBFC, including the winding up of the company. 

Based on Market Intelligence reports, complaints, exception reports from the companies’ statutory auditors, information obtained through SLCC meetings, etc., RBI takes prompt action, including imposing penalties and taking legal action against companies that are found to be violating RBI’s instructions or norms. In the State Level Coordination Committee Meetings, the Reserve Bank quickly disseminates such information to all financial sector regulators and enforcement organisations. 

The Reserve Bank of India, a leading institution of public policy, has been at the forefront of taking various steps to raise public awareness of the need to exercise caution when investing their hard-earned money. The measures include publishing cautionary notifications in the media, distributing educational leaflets and pamphlets, and interacting closely with the public via outreach programmes, Town hall meetings, and participation in trade shows and exhibitions organised by the State Government. It occasionally even asks those newspapers with big readerships (both English-language and regional) to refrain from publishing adverts from unincorporated organisations looking for deposits. 

Measures to be taken by the Depositors

Before making any deposit, each depositor must contact the NBFC and take the following precautions:

• Verify the NBFC Registration 
  Every NBFC receives a Certificate of Registration (CoR) from the Reserve Bank. This certificate confirms that an NBFC has received a particular permit from the RBI to take deposits. A depositor must, therefore, carefully review the certificate to confirm that the NBFC is qualified to receive deposits.
• Make sure NBFC is eligible
  The depositor is required to review the list of NBFCs that are authorised to take public deposits. Also, they must ensure that it does not appear on the website, that the list of businesses that are not permitted to collect deposits.
• Limited depositor’s rate
  An NBFC registration may only provide a depositor with an interest rate that does not exceed 12.5%. However, the RBI consistently modifies interest rates in response to macroeconomic circumstances. The Reserve Bank updates the NBFC list and FAQs on its website whenever interest rates change.

Acknowledgement for a deposit from the depositor

Every deposit made with the company requires a proper receipt, which the depositor must demand. An officer designated by the company must adequately sign the receipt. The receipt must also include the following:

• The depositors’ name
• The deposit dates
• An amount in both words and numbers
• Expires on date
• Deposit amount
• Interest rate payable

The depositors must confirm that the NBFC has given the brokers or agents permission before using them to collect public deposits on behalf of NBFCs. Public deposits are unsecured, and the depositor must be informed of this. NBFC depositors are not eligible for the Deposit Insurance Facility.

How is NBFC Registration beneficial? 

No firm may begin or continue as a non-banking financial institution without a certificate of registration and without having Net Owned Funds as laid down under Section 45-IA of the RBI Act, 1934.

Following a recent change to the NBFC regulations, it was discovered that several NBFCs were no longer operating as NBFIs but were still holding onto their Certificates of Registration (CoR), despite not being required or eligible to do so by RBI. It has been decided that all Non-Banking Financial Companies should submit a certificate every year to the effect that they continue to undertake the business of NBFC from their Statutory Auditors, necessitating holding of certificate of registration under Section 45-IA of the RBI Act, 1934. This is done to ensure that only NBFCs who are engaged in the business of NBFI hold CoR. 

Post NBFC Registration Benefits

If businesses that are required to be registered with the Reserve Bank as NBFCs are discovered to be engaging in non-banking financial activity as their primary business, such as lending, investing, or accepting deposits, without applying for registration, the Reserve Bank has the authority to impose penalties or fines on them or even bring legal action against them. A Registered NBFC provides security for the capital invested in the business and aids in winning the trust of borrowers. 

For the Reserve Bank to take the proper action for violating the terms of the RBI Act, 1934, public members should report any entities that engage in non-banking financial activity but do not appear on the list of authorised NBFCs on the RBI website. 

Conclusion 

The NBFC registration process is very simple and easy. Having an NBFC Registration offers benefits, which draws many customers to non-traditional banking institutions for deposit borrowing. Also, the Reserve Bank of India periodically regulates the NBFC industry in the best interests of the depositors. 

The depositor is required to review the list of NBFCs that are authorised to take public deposits. Also, they must ensure that it does not appear on the www.rbi.org.in list of businesses that are not permitted to collect deposits.

Also Read:
NBFC Registration: A complete Guide
Documents Required for NBFC Registration in India