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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.
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.
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:
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:
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.
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.
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 Systemically Important Non-Deposit taking/ holding Non-Banking Financial Company must submit these returns:
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.
Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.
