NBFC

Reasons for Cancellation of NBFC License in 2025

With India’s growing economy, Non-Banking Financial Companies (NBFCs) have expanded significantly across the nation, catering to the financial needs of the public. An NBFC offers banking-like services without holding a full banking license like traditional banks. However, it is still regulated by the Reserve Bank of India (RBI).

In recent years, the RBI has cancelled the registration of several NBFCs due to non-compliance with regulatory requirements. This has raised concerns among the public and made it more challenging for existing NBFCs to continue their operations.

There are specific procedures and grounds under which the RBI cancels an NBFC license. This article explores the 15 key reasons for NBFC license cancellation and the related processes.

Role of RBI for NBFCs (Non-Banking Financial Companies)

Under the Reserve Bank of India Act, 1934, the Reserve Bank of India (RBI) has the authority to regulate and oversee NBFCs in India. This includes issuing and cancelling certificates of registration for Non-Banking Financial Companies (NBFCs).

As the primary regulatory authority, the RBI ensures that NBFCs operate in compliance with legal and financial guidelines. It grants an NBFC license only if the applicant meets all the prescribed eligibility criteria and regulatory requirements.

What are the Eligibility Criteria to Register as NBFC?

Some of the eligibility criteria to register as NBFC are given below:

• The applicant must be registered under the Companies Act, 1956 or 2013.
• The applicant company must have a minimum net owned fund of ₹10 crore.
• At least one director of the applicant company must have experience in the financial industry to operate the NBFC business.
• The CIBIL score of the applicant company’s directors must be above 700.
• A well-defined business plan for a minimum of five years with detailed information on operational and financial strategy.

When RBI Can Cancel the NBFC License?

Here mentioned below are the 15 reasons NBFC license can be cancelled by the Reserve BANK OF India (RBI):

1. Non-Compliance with RBI Regulations

If an NBFC fails to comply with RBI’s strict regulations on financial stability, risk management, and governance, it may face serious consequences. Any non-compliance or violation of these rules can result in the cancellation of NBFC registration.

2. Non-Maintenance of Net Owned Fund

NBFCs must maintain the minimum Net Owned Fund (NOF) as prescribed by the Reserve  Bank of India (RBI). Recently, the RBI revised the NOF requirement to ₹10 crore for starting and operating a Non-Banking Financial Institution, effective from October 1, 2022. Failure to meet this requirement may result in the cancellation of the NBFC license by the RBI.

3. Not Operate in the Public Interest

NBFCs must operate their business in the public interest and have board-approved policies on key matters, such as the Fair Practices Code, Recovery Policy, and Grievance Redressal Policy. These policies must be uploaded on the company’s official website and displayed on its premises. The purpose of these policies is to ensure that customers are well-informed about the NBFC’s practices. Additionally, all policies must comply with the notifications, circulars, and master directions issued by the RBI from time to time.

4. Failed to re-pay the deposits

If an NBFC fails to repay its deposits or any part thereof as per the agreed terms and conditions, depositors can take legal action based on those terms. They may approach the Company Law Board or Consumer Forum or file a civil suit in court to recover their deposits from the NBFC. Additionally, NBFCs are advised to follow the grievance redressal procedure accordingly. If, despite these measures, the NBFC is still unable to repay the deposits, the RBI will intervene. Before cancelling the NBFC’s registration, the RBI will provide the concerned NBFC with an opportunity to present its clarification.

5. Engaging in unethical or Fraudulent Activities

If an NBFC is found engaging in fraudulent practices, such as misrepresentation of data, unauthorized lending, or running a Ponzi scheme, it may face severe action. Such activities can lead to the cancellation of the NBFC license by the RBI.

6. Not Complied with prohibitory orders of RBI

If the RBI, after inspecting an NBFC, issues a prohibitory order against the company or any related NBFC/RNBC in connection to its directors or promoters, the NBFC must comply with the order immediately. Failure to do so may result in the cancellation of its license.

7. Not Carrying NBFC Activity

The principal business of an NBFC must be financial activity rather than any other business. A company qualifies as an NBFC if its financial assets make up more than 50% of its total assets and its income from financial assets exceeds 50% of its gross income. These criteria are known as the 50-50 test and are essential for determining whether a company falls under the NBFC category.

Only companies that meet this requirement can continue operating as NBFCs under RBI regulations. Non-compliance with this test may result in the company losing its NBFC status or facing regulatory action. Therefore, NBFCs must ensure that their financial activities remain dominant to maintain their registration and comply with RBI guidelines.

8. Non-Complied NBFC

The following RBI compliances must be fulfilled by the NBFC to avoid potential NBFC license cancellation.

• Returns to be submitted by deposit-taking NBFCs

1. NBS-1 Quarterly returns on deposits in First Schedule
2. NBS-2 NBFC accepting public deposits must submit a quarterly return on prudential norms.
3. NBS-3 A quarterly return on liquid assets needs to be submitted by NBFC accepting public deposits
4. NBS-4 An annual return needs to be filled by an NBFC company whose registration has been rejected by the RBI but still holds public deposits (though NBS-5 are withdrawn as submission of NBS-1 has been made quarterly)
5. NBS-6 NBFC taking deposits with a total assets of INR 100 crore must submit a monthly return on exposure to capital market.
6. Half-Yearly ALM Return – NBFCs holding public deposits exceeding ₹20 crore or having an asset size over ₹100 crore must submit a half-yearly Asset Liability Management (ALM) return as per RBI regulations.
7. Audited Balance Sheet and Auditor’s Report – NBFCs accepting public deposits must submit their audited balance sheet and auditor’s report within the prescribed timeframe as per RBI regulations.
8. A branch info return must be filed on time

• Returns to be Submitted by NBFCs-ND-SI

NBS-7 Must submit a return of quarterly statement of capital funds, risk weighted assets, risk asset ratio etc.

A monthly return on important financial parameters of NBFCs-ND-SI.

ALM returns:

• Statement of Short-Term Dynamic Liquidity (NBS-ALM1) – Monthly
• Statement of Structural Liquidity (NBS-ALM2) – Half-Yearly
• Statement of Interest Rate Sensitivity (NBS-ALM3) – Half-Yearly

A Branch Info Return

A non-deposit-taking NBFC with assets exceeding ₹50 crore but less than INR 100 crore must submit a quarterly return on key financial parameters. This includes basic details such as the company name, address, Net Owned Funds (NOF), and profit or loss for the last three years.

9. Directors are not Fit and Proper

To operate an NBFC, its directors must meet the fit and proper criteria as per RBI regulations. The key requirements are as follows:

• Relevant Financial Background – Directors must have experience in finance to effectively manage and operate the NBFC.
• No Criminal or Civil Cases – There should be no initiated, pending, or convicted civil or criminal cases against the directors. This also applies to any entities associated with them for violations of economic laws and regulations.
• No Disciplinary Actions or Disqualifications – Directors must not have any past or pending disciplinary actions, convictions, or professional bans. They should also not be disqualified under Section 164 of the Companies Act, 2013.
• Compliance with Revenue Authorities – Directors should not have been found guilty of violating laws related to Customs, Excise, Income Tax, Foreign Exchange, or other revenue authorities.
• Limit on Directorships – Directors must ensure that the number of directorships held does not exceed the limits set under Section 165 of the Companies Act, 2013.
• No Criminal Involvement – Directors must not be involved in any criminal cases, including offences under Section 138(1) of the Negotiable Instruments Act (related to dishonoured cheques).

10. Violations of RBI’s Corporate Governance Guidelines

The RBI’s corporate governance guidelines are designed to ensure transparency and accountability in NBFC operations. If an NBFC fails to comply with key aspects such as board independence, risk management systems, or audit functions, it may face regulatory intervention.

11. Failed to Submit Books of Accounts

If an NBFC fails to maintain proper books of accounts or does not provide account records during an RBI inspection, it may face serious consequences. Additionally, incomplete or missing financial records can lead to the cancellation of the NBFC’s license.

12. Failure to maintain Sufficient Capital Adequacy Ratio (CAR)

To absorb financial risk, an NBFC must maintain a capital adequacy ratio (typically 15%). Failure to meet this requirement can lead to cancellation of the NBFC license by the RBI.

13. Involvement in Money Laundering Activities

If an NBFC is found engaging in illegal financial activities, such as money laundering, the RBI can cancel its license under the Prevention of Money Laundering Act (PMLA).

14. Unsatisfactory Financial Health

If an NBFC’s financial position deteriorates due to mismanagement, excessive Non-Performing Assets (NPA), or inability to repay liabilities, the RBI may cancel its license.

15. Failure to Implement KYC and AML Norms

Know Your Customer (KYC) and Anti-Money Laundering (AML) are two critical regulations that every financial institution must follow. Failure to comply with these regulations can lead to regulatory action, including the cancellation of an NBFC license.

What is the Procedure Followed by RBI to Cancel the NBFC License?

The step-by-step procedure to be followed by the RBI to cancel the NBFC license is as given below:

1. First and foremost, when the RBI detect any discrepancies in the working of NBFC not aligning its business activities according to the provisions as mentioned in the RBI Act, 1934 or in case the NBFC is acting against the interest of the public or various other reasons as mentioned above, then the Reserve Bank of India (RBI) hold the legal power to cancel the NBFC registration certificate or license.
2. Secondly, the RBI may discuss its decision to cancel an NBFC’s registration or license with the company, explaining the reasons for cancellation. However, the RBI holds sole authority over this decision and must exercise its power fairly, judiciously, and reasonably while staying within the limits set by RBI laws and regulations.
3. The RBI will issue a show cause notice to the NBFC, asking for a valid and legitimate reason as to why action should not be taken against them.
4. Before making a final decision to cancel an NBFC’s registration, the RBI will give the company a final opportunity to present its case with valid evidence and proof. However, if the RBI believes that delaying the cancellation would pose a risk to the public or depositor interest or NBFC, it may take immediate action.

What is the Impact of NBFC Registration Cancellation?

Once the RBI cancels an NBFC’s license, the company must immediately cease all business operations. It will be prohibited from conducting daily activities, including lending, borrowing, accepting deposits, or offering financial services as a Non-Banking Financial Company (NBFC). Additionally, the NBFC must inform its clients, stakeholders, and regulatory bodies about the cancellation and settle any outstanding liabilities as per regulatory guidelines. Failure to comply with these restrictions may lead to legal consequences and further penalties imposed by the Reserve Bank of India (RBI).

Summing Up

The cancellation of an NBFC license by the Reserve Bank of India (RBI) is a serious regulatory action taken to uphold financial stability, transparency, and public interest. NBFCs play a crucial role in the financial sector, but they must adhere to strict RBI guidelines to continue their operations. Non-compliance with regulatory norms, unethical practices, poor financial health, or failure to meet capital and governance standards can lead to the revocation of an NBFC’s license.

To avoid cancellation, NBFCs must ensure compliance with RBI regulations, maintain adequate financial reserves, implement strong governance policies, and operate in the best interest of depositors and the public. Proactive adherence to regulatory requirements not only safeguards the NBFC’s existence but also strengthens its credibility in the financial sector.

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