Know The RBI Compliance for NBFC

January 13, 2024

Registrationwala

The rules and regulations of the Reserve Bank of India (RBI) were easy to follow for NBFCs. But after the Sahara case in 2012, which involved a major Non-Banking Financial Company group. The irregularities in finances and the concerns of the investors work as a wake-up call for RBI to make its regulatory framework more strong for NBFCs.

After the investigation of the case, multiple loopholes were found in the existing regulations. So, the RBI implement strict rules for NBFCs to enhance transparency and investor protection in the sector.

In the previous rules, the NBFCs were allowed to operate with low capital, follow easy compliance, lack heavy liquidity norms, less corporate governance practices. The new and more stringent compliances for NBFCs are shared in the article.

What are NBFCs?

A Non-Banking Financial Company (NBFC) is a registered company that provides loans and advances to people who don’t have access to big financial institutions and banks.

They acquire shares, stocks, bonds, debentures, and securities issued by the government and local authorities. Also, they engage in leasing, hire-purchase, insurance, and chit-fund businesses. However, they do not include institutions whose primary business is agriculture or industrial activity, purchase or sale of goods (other than securities). They provide services for the sale/ purchase/ construction of immovable property.

Also, the NBFC receives deposits under any scheme in lump sum amounts or instalments by way of contribution or through any other way. This type of institution is also known as a non-banking financial company.

Core Compliances that NBFCs Must Follow

In the finance industry, the NBFCs are important entities. They have to follow the compliance of the Reserve Bank of India (RBI) to operate legally. These regulations help to better, and more transparent operations. Here are some of the key compliances to follow:

Registration with RBI

As per Section 45-IA of the RBI Act, 1934, every NBFC has a certificate of registration from the Bank with a minimum Net Owned Funds of Rs. 25 lakh. The limit was Rs. 2 crore since April 1999 to start or continue the business of a NBFC.

However, some categories of NBFCs are exempted from the requirement of registration with RBI, this is done to prevent dual regulation. These categories include:

Venture Capital Fund
Merchant Banking companies
Stock broking companies registered with SEBI
Insurance Companies have a Certificate of Registration issued by IRDA
Nidhi companies defined under the Companies Act, 1956
Chit companies defined under the Chit Funds Act, 1982
Housing Finance Companies
Mutual Benefit Company.

Maintain Regulatory Standards

The NBFC first maintain a capital adequacy ratio, which means holding sufficient capital against their assets and liabilities. Further, the exposure and lending to single borrowers or groups are restricted to prevent the excessive concentration of risk. In addition to this, the specific norms mandate the classification of doubtful or bad loans. And, setting the provisions for taking potential loss which is known as asset classification and provisioning.

Liquidity Regulations

For financial stability, the RBI make it mandatory for NBFC to maintain sufficient liquid assets. It helps to meet short-term obligations and prevent funding disruptions. However, the NBFCs should avoid relying only on short-term borrowings and maintain a balanced credit profile. The NBFC can do this by diversifying the fund sources.

What are the Requirements to Register with RBI?

Any company which is incorporated under the Companies Act, 1956 or 2013 want to commence the business of a NBFC. That is mentioned under Section 45 I(a) of the RBI Act, 1934 must comply with the following:

The company must registered under Section 3 of the Companies Act, 1956 or 2013.
Must have a minimum net-owned fund of Rs. 200 lakh. This minimum fund is required for specialized NBFCs like NBFC-MFIs, NBFC-Factors, and CICs.

Must Submitted Returns by Deposit-taking NBFCs

NBS-1 Quarterly Returns on Deposits in First Schedule.
NBS-2 Quarterly return on Prudential Norms must submit by NBFC to accept public deposits.
NBS-3 Quarterly return on Liquid Assets by deposit taking NBFC.
NBS-4 Annual return of critical parameters by a rejected company holding public deposits.
NBS-6 Monthly return on exposure to capital market by deposit-taking NBFC with total assets of ₹ 100 crore and above.
Half-yearly ALM return by NBFC holding public deposits of more than ₹ 20 crore or asset size of more than ₹ 100 crore
Audited Balance sheet and Auditor’s Report by NBFC accepting public deposits.
Branch Info Return.

Returns Submit by NBFCs-ND-SI

The Systemically Important Non-Deposit taking/ holding Non-Banking Financial Company must submit these returns:

NBS-7 A Quarterly statement of capital funds, risk-weighted assets, risk asset ratio etc., for NBFC-ND-SI.
Monthly Return on Important Financial Parameters of NBFCs-ND-SI.
ALM returns:
- Statement of short-term dynamic liquidity in format ALM [NBS-ALM1] -Monthly,
- Statement of structural liquidity in format ALM [NBS-ALM2] Half yearly,
- Statement of Interest Rate Sensitivity in format ALM -[NBS-ALM3], Half-yearly
Branch Info Return.

Conclusion

Non-Banking Financial Companies (NBFCs) have to comply with the RBI guidelines, rules and regulations. In case of non-compliance with the regulations, the company will face a penalty from RBI or the NBFC license can be cancelled. These compliances depend on the type of NBFCs. But the one most common compliance that most of the NBFCs have to follow is to register with the RBI. If you want to obtain a NBFC license, then reach out to Registrationwala. We assist you from application to getting a license.