Depositor Protection Issues in a registered NBFC

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Depositor Protection Issues in a registered NBFC

After completing an NBFC registration process, the NBFC can fully function as a financial institution. It can provide loans to the needful borrowers and accept deposits from enthusiastic depositors. To know how to get NBFC registration from RBI, you can visit our NBFC service page at Registrationwala.

After the NBFC registration, the RBI issues some guidelines as well as precautions that must be observed by businesses intending to deposit their money in a registered NBFC. To secure the funds deposited by a lender in an NBFC registration, every NBFC engager must follow them. Therefore, this article discusses the protection issues that an NBFC depositor might face and beware of the potential mishap.

NBFC Regulations for the Depositors

The RBI has defined some regulations for accepting deposits by an NBFC. We have detailed them below:

Acceptance Period

The NBFCs are allowed to accept or renew public deposits for a minimum period of 12 months and a maximum of 60 months. They cannot accept deposits repayable on demand.

Ceiling Rate

NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 12.5 percent per annum. The interest may be paid or compounded at rests not shorter than monthly rests.

Other than fund deposits

NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.

Credit Rating

NBFCs should have a minimum investment-grade credit rating.

Deposit insurance and Repayment

The deposits with NBFCs are not insured. RBI does not guarantee the Repayment of deposits by NBFCs.

Disclosures

Certain mandatory disclosures are to be made about the NBFC registration company in the Application Form issued by the company soliciting deposits.

Precautions to be taken by the Depositor

Every Depositor must place a deposit with the NBFC and take the following precautions before placing any deposit:

Check NBFC eligibility

The depositor must check the list of NBFCs permitted to accept the public deposit. They must also check that it is not appearing in the list of companies prohibited from accepting deposits, which is available at www.rbi.org.in.

Check NBFC Registration

The Reserve Bank issues every NBFC a Certificate of Registration (CoR). This certificate reflects that RBI has specifically authorized an NBFC to accept deposits. Therefore, a Depositor must scrutinize the certificate to ensure that the NBFC is authorized to accept deposits.

Limit to the Depositor’s Rate in an NBFC

The maximum interest rate that an NBFC registration can pay to a depositor should not exceed 12.5%. However, the RBI keeps altering the interest rates depending on the macroeconomic environment. The Reserve Bank publishes the change in the interest rates on www.rbi.org.in /Sitemap/NBFC List/FAQs.

Deposit Receipt from the Depositor

The depositor must insist on a proper receipt for every amount of deposit placed with the company. An officer authorized by the company must duly sign the receipt. The receipt must also state

• Date of the deposit
• Name of the depositor
• Amount in words and figures
• Rate of interest payable
• Maturity date
• Deposit amount

If some brokers or agents collect public deposits on behalf of NBFCs, the depositors must ensure that the NBFC authorizes the brokers/agents. The depositor must be aware that public deposits are unsecured. The Deposit Insurance facility is not available to depositors of NBFCs.

Default in Repayment of Deposit in an NBFC

The Reserve Bank of India does not guarantee repayment of deposits by NBFCs. Though they may be authorized to collect deposits. Therefore, investors and depositors must take informed decisions while placing a deposit with an NBFC.

 Consult the Company’s Board in case of default

If an NBFC defaults in Repayment of a deposit, the depositor can approach Company Law Board or Consumer Forum or file a civil suit in a court of law to recover the deposits. NBFCs are also advised to follow a grievance redress.

Premature Action by the State Government

Further, at the level of the State Government, the State Legislation on the Protection of the Interest of Depositors (in Financial Establishments) empowers the State Government to take action even before the default takes place or complaints are received from depositors. If there is the perpetration of an offense and the intention is to defraud, the State Government can even attach properties.

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