Non-Banking Financial Companies (NBFCs) are subject to a range of regulatory requirements designed to ensure their sound operation and financial stability. These requirements are set forth by the Reserve Bank of India (RBI) and include periodic submissions of financial reports, maintenance of minimum net owned funds, and adherence to specific operational guidelines. Compliance involves regular audits, submission of annual returns, and ensuring that the company meets all regulatory criteria related to capital adequacy and risk management. Additionally, NBFCs must ensure proper documentation and adherence to consumer protection norms to maintain transparency and accountability. Regular compliance helps in maintaining operational integrity, securing financial stability, and fostering trust among stakeholders
Term ‘Principal Business’ in NBFC
In the context of Non-Banking Financial Companies (NBFCs), “principal business” refers to the core activities that the company primarily engages in. This includes financial services like lending, investment, or asset management, which form the mainstay of its operations. For an NBFC, maintaining a principal business in financial activities is crucial to meet regulatory requirements and ensure that its operations align with the Reserve Bank of India’s guidelines. This focus on financial activities helps NBFCs stay compliant and effectively serve their financial roles in the economy.
What Are The Regulations for Non-Deposit Accepting NBFCs With Assets less than ₹ 500 Crore?
For non-deposit accepting NBFCs with assets below ₹500 crore, the regulatory framework depends on their interaction with clients and access to public funds.
If an NBFC does not accept public deposits and does not engage directly with clients, it is generally subject to fewer regulatory constraints. These NBFCs primarily need to comply with operational and reporting requirements without the need for stringent prudential guidelines.
In cases where the NBFC interacts with clients but does not accept public deposits, it must adhere to conduct-related regulations. This includes compliance with Know Your Customer (KYC) norms and Fair Practice Code (FPC) to ensure proper client handling and transparency.
For NBFCs involved with both public funds and client interactions, the regulatory framework is more rigorous. These entities must follow both prudential norms, which focus on financial stability and risk management, and business conduct guidelines, which regulate client interactions and ensure fair practices.
Different Categories of NBFCs Registered With RBI.
Non-Banking Financial Companies (NBFCs) registered with the RBI are classified into various categories based on their functions and services. The different types of NBFCs include:
- Investment and Credit Company (ICC): These companies engage in providing loans and investments, covering both lending and investment activities.
- Mortgage Guarantee Companies (MGCs): These offer guarantees to mortgage loan providers, ensuring the repayment of home loans in case of default by borrowers.
- Non-Banking Financial Company – Factors: They specialize in the business of factoring, where receivables are purchased, giving businesses immediate liquidity.
- Microfinance Institutions (NBFC-MFI): These provide small loans to individuals, particularly in underserved or low-income segments, helping promote financial inclusion.
- Infrastructure Finance Company (IFC): These focus on lending for large-scale infrastructure projects like roads, airports, and energy.
- Systemically Important Core Investment Company (CIC-ND-SI): They primarily hold investments in group companies and do not actively engage in other financial activities.
Types of NBFCs on the Basic of Liability.
Deposit-taking NBFCs (NBFC-D): These NBFCs accept public deposits and provide financial services similar to banks. They are regulated by the RBI and must adhere to strict guidelines regarding deposits, ensuring the security of public funds.
Non-Deposit-taking NBFCs (NBFC-ND): These companies do not accept public deposits and rely on other sources for their funding, such as market borrowings and equity capital. They are further categorized based on their size:
- Systemically Important NBFCs (NBFC-ND-SI): Non-deposit-taking NBFCs with an asset size of ₹500 crore or more, considered important due to their potential impact on the financial system.
- Other NBFC-NDs: These are smaller NBFCs with an asset size below ₹500 crore.
Annul Compliance
- Board Resolution Filing
- NBFCs must submit a certified copy of the board resolution regarding the company’s adherence to RBI norms. This resolution ensures that the company is compliant with regulatory guidelines.
- Annual Return Submission
- NBFCs are required to file their annual return with the RBI. This return provides details on financial statements, assets, liabilities, and capital adequacy ratios to monitor the company’s health and stability.
- Statutory Audits
- An annual statutory audit is mandatory for all NBFCs. It ensures the financial statements of the company are accurate and conform to the legal and regulatory framework.
- NBS-7 Filing
- Non-deposit-taking NBFCs must submit the NBS-7 return annually. This return provides detailed information on the company’s financial position, income, and expenditure.
- Fair Practices Code (FPC)
- NBFCs must adopt and publish a Fair Practices Code, ensuring transparency in loan processing, disclosures, and grievance redressal mechanisms.
- Tax Compliance
- Filing income tax returns, GST returns, and other tax-related documents is essential to remain compliant with tax laws.
- KYC & AML Compliance
- NBFCs must follow Know Your Customer (KYC) and Anti-Money Laundering (AML) guidelines by the RBI to prevent fraud and ensure safe financial practices.
Event Based Compliance
- Change in Directors or Key Personnel: Notify RBI about changes in leadership.
- Change in Registered Office: Inform RBI of any address changes.
- Issuance of Debentures or Bonds: Report securities issuance to the RBI.
- Changes in Capital Structure: Notify RBI of any changes in paid-up capital or shareholding.
- Merger, Amalgamation, or Acquisition: Seek RBI approval for structural changes.
- Surrender of NBFC License: Follow deregistration process when closing operations.
- Change in Statutory Auditor: Notify RBI of auditor changes.
Types of Returns
Types of Returns Filed by NBFCs
- NBS-1 Return
Filed by deposit-taking NBFCs (NBFC-D) quarterly to report financial details such as deposits, assets, and liabilities. - NBS-2 Return
Quarterly return filed by NBFC-Ds to provide information on prudential norms like asset classification, provisioning, and capital adequacy. - NBS-7 Return
Annual return submitted by non-deposit-taking NBFCs (NBFC-ND) with an asset size of ₹500 crore or more to report their financial position. - ALM (Asset Liability Management) Return
Filed quarterly or monthly by NBFCs to report their asset-liability mismatches, ensuring sound risk management. - CERSAI Return
NBFCs are required to file details of any loans granted or assets secured through the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI). - Auditor’s Certificate on Income Recognition and Asset Classification (IRAC) Norms
Annual submission by NBFCs to certify compliance with IRAC norms, which ensures proper income recognition and loan classification. - Statutory Auditors Certificate (SAC)
Annual return filed by NBFCs to certify adherence to various RBI regulations and compliance standards.