Reasons Behind NBFC License Cancellation

June 16, 2023
Registrationwala

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Reasons Behind NBFC License Cancellation

Reasons Behind NBFC License Cancellation

June 16, 2023

Registrationwala

Recently, RBI canceled the Certificate of Registration (CoR) of seven Non-Banking Financial Institutions (NBFCs) under Section 45-IA (6) of the RBI Act, 1934.

“The Reserve Bank of India is solely responsible for regulating and supervising the NBFCs for the healthy growth of financial institutions. The RBI has a right to issue the license and cancel it.”

So what are the reasons behind canceling the license of these NBFCs?

When RBI Can Cancel the NBFC License?

The following are the reasons behind canceling the NBFC license by RBI:

Non-Maintenance of Net Owned Fund

The companies who want to apply or currently applying for the NBFC license required a minimum Net Owned Funds of Rs. 10 Crore. Previously it was 2 crore. The NOF amount may differ as per the specific type of NBFC.

To NBFCs must fulfill the requirement of NOF to obtain a license. The conduct of the business without the NBFC license is a violation as per Section 45-IA. According to the data for the financial year 2019, RBI canceled the 1701 NBFC license because these companies failed to meet the minimum capital requirements.

Not Operate in the Public Interest

The NBFC has to follow the board-approved policies such as:

Fair Practice Code Policy
Recovery Policy
Grievance Redressal Policy

These policies must be available on the company's website and on the company’s premises. By doing this, the customer will get aware of the NBFC practices that the company is doing. All these policies must be in order for the public interest.

Failed to Re-Pay the Deposits

If an NBFC doesn’t repay the deposit as per the terms and conditions then the Depositor can approach Company Law Board or Consumer Forum and can file a suit in court to recover the deposit.

If RBI sees that the company is not in a condition to re-pay the deposit or fails to the deposit, then RBI gives a chance to the NBFC for clarification before the cancellation of their license.

Not Carrying NBFC Activity

The principal business of an NBFC should be in financial activities. A company can provide financial services when its assets will be more than 50% of the total assets and constitute 50% of gross income.

A company that fulfills this criterion can work as an NBFC as per the RBI. This criteria is known as the 50-50 test and every NBFC has to follow this on a continuous basis to run an NBFC Company.

Failed to Submit Books of Accounts

If an NBFC doesn’t manage its books of accounts properly and fails to surrender the account books or other vital records during an inspection of the RBI audit team. Also, the non-completion of the accounts books and documents can lead to the revoke of the license.

Directors are Not Fulfilling the Requirements

The Directors must fulfill the following criteria to run an NBFC:

Must have a finance background.
Should not be included in the violation of any economic laws and regulations.
Should not be banned from taking participation in any professional occupation.
Should not be disqualified as per Section 164 of the Companies Act, 2013.
Should not be found guilty in the violation of any custom/ income tax/ foreign exchange/ other revenue authorities.
Should not include in any criminal case, under section 138(1) of the Negotiable Instrument Act.

Impact of NBFC License Cancellation

When the NBFC license got terminated, the company must stop its operations as soon as possible. Also, they can’t perform their regular activities from the date of the License Cancellation.

They can’t perform any new activity or are not allowed to help others by providing financial services. Ultimately, they can’t work as an NBFC. Mostly, when these companies lose their license, then it becomes difficult for them to raise money and they gradually get shut down.

Conclusion

An NBFC provides financial services to those communities that don’t have access to traditional banks and other financial institutions. It fulfills the needs of various sectors of the economy, and all NBFCs play a crucial role in the Indian Financial System.

But some NBFCs are found not following the rules, there can be two reasons, first, they want to modify the rules as per their convenience and second, they are not aware of some rules and regulations.

At Registrationwala, we provide services to companies to help them understand every NBFC license requirement so that their license will not get canceled. If you have any questions regarding the NBFC license, then reach out to us.