Payment of interest on overdue public deposits by NBFC

Swetha Dhinesh

07 Jun, 2023

The Reserve Bank of India regulates Non-banking Financial Companies in accordance with the RBI Act of 1934. Investing in a fixed deposit with NBFC is a good option currently for anyone who wants to grow financially. Due to the credit risk attached to NBFCs, they typically provide higher interest rates than bank fixed deposit interest rates. According to the negotiated terms and conditions, NBFCs are often expected to pay interest timely on public deposits. Let us discuss the payment of interest on overdue public deposits by NBFC in this blog.

General understanding of the NBFC payment of interest 

Deposits in NBFCs provide a higher interest rate, but the investor needs to be aware of the risks involved. Bank FDs are safer, and this guarantees that the deposits of the investors are safe even in the event of a bank’s liquidation. On the other hand, NBFC fixed deposits do not provide such protection. Furthermore, FDs made by NBFCs have a higher credit risk or default risk than FDs made by banks.

Due to this, credit rating organisations like CRISIL and ICRA assign safety ratings to various NBFCs depending on their standing and qualifications. Fixed deposits from NBFCs are less risky and safer if they have AAA credit ratings from rating organisations like CRISIL, CARE, and ICRA. When investing in fixed deposits, choosing NBFCs with a solid reputation and good safety ratings is best to prevent losing your principal or interest payments.

What is an Overdue Fixed Deposit?

A Fixed Deposit is an agreement between a depositor and a bank, non-banking financial company, or financial institution. The depositor often agrees to maintain the money deposited with the financial institution for the agreed-upon period in exchange for a certain rate of interest, according to the agreement. On the other side, the financial institution consents to pay the interest and return the invested principle on the contract’s maturity date.

Fixed deposits are becoming more and more well-liked in recent years as great tools for accumulating money, especially with growing interest rates. The deposit tenure can be chosen based on the depositor’s financial objectives. The deposit holder must either remove the money when the deposit matures or renew it for the chosen time. The FD becomes overdue if the depositor fails to act on either of the two options.

Ceiling on interest rates

No non-banking financial institution shall solicit, accept, or renew public deposits at an interest rate that exceeds twelve and a hair per annum. Interest may be compounded or paid at intervals not less frequent than monthly intervals.

Payment of interest on overdue public deposits

1. In accordance with its discretion, a non-banking financial institution may permit interest on an overdue public deposit or a portion of the said deposit from the maturity date of that deposit on the following terms:
   1. If all of the overdue deposit, or a portion of it, is renewed in accordance with the renewal of public deposit of other provision of the master directions, from the date of its maturity until a later date, and 
   2. Interest is permitted at the applicable rate in effect on the date of the overdue deposit’s maturity and is only payable on the portion of the deposit so renewed. The non-banking financial institution shall be obligated to pay interest from the date of claim until the date of repayment at the rate applicable to the deposit if it fails to repay the deposit money along with interest on maturity on the claim made by the depositor.
2. The NBFCs must follow the procedure outlined below in order to pay interest on deposits that have either been seized by government authorities or frozen until additional approval is received by the relevant government authorities:
   1. Upon maturity, a request letter must be acquired from the depositor. The NBFCs must also advise the depositor to specify the time for which the deposit is to be renewed in the request letter they receive from the depositor for renewal. If the depositor fails to use this option, the NBFCs must renew the agreement for a term that is equal to the initial term.
   2. No fresh receipts will be given out. However, a relevant notation indicating renewal must be made in the deposit ledger.
   3. The depositor must tell the relevant government department of the renewal of the deposit via registered letter, speed post, or courier service. The rate of interest at which the deposit is renewed must also be specified in the advice to the depositor.
   4. Renewal must be done starting from the date of maturity if the overdue term does not exceed 14 days on the date the request letter was received. Suppose it is overdue for more than 14 days. In that case, NBFCs must pay interest for the extra time in accordance with their policy and retain the money in a separate, interest-free sub-account that will be disbursed along with the original fixed deposit.

However, the NBFCs must first acquire approval from the relevant Government agencies before making the final repayment of the principal and interest that have accrued.

When should NBFC intimate the maturity of deposits to depositors?

The non-banking financial institution is responsible for informing the depositor of the deposit’s maturity details at least two months before the deposit’s maturity date.

Renewal of public deposit

When a non-banking financial company allows an existing depositor to renew the deposit before maturity in order to take advantage of a higher rate of interest, the company must pay the depositor the increase in the rate of interest in the manner : 

• Renew the deposit in accordance with the other provisions of the master direction Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016. and for a period longer than the remaining period of the original contract; and 
• If the deposit had been accepted for the period for which it had run, the interest rate would have been one percentage point lower than it would have otherwise been; any interest already paid in excess of that rate is refunded.

Conclusion

The guidelines are framed to safeguard depositor interests and guarantee that NBFCs treat customers fairly. It is important for NBFCs to follow RBI regulations regarding the payment of interest on public deposits and to make sure that depositors are promptly paid interest. It encourages transparency, consumer trust, and adherence to legal standards. Depositors should contact the appropriate NBFC for resolution if they have questions or problems with the payment of interest on their deposits. 

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