17 December 2021

NBFC’s

1. What is a Non-Banking Financial Company (NBFC)?

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act
engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authority or other
marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but
does not include any institution whose principal business is that of agriculture activity, industrial
activity, purchase or sale of any goods (other than securities) or providing any services and
sale/purchase/construction of immovable property. A non-banking institution which is a company and
has principal business of receiving deposits under any scheme or arrangement in one lump sum or in
installments by way of contributions or in any other manner, is also a non-banking financial company
(Residuary non-banking company).

2. What does conducting financial activity as “principal business” mean?

Financial activity as principal business is when a company’s financial assets constitute more than 50
per cent of the total assets and income from financial assets constitute more than 50 per cent of the
gross income. A company which fulfils both these criteria will be registered as NBFC by RBI. The term
'principal business' is not defined by the Reserve Bank of India Act. The Reserve Bank has defined it
so as to ensure that only companies predominantly engaged in financial activity get registered with it
and are regulated and supervised by it. Hence if there are companies engaged in agricultural
operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or
construction of immovable property as their principal business and are doing some financial business
in a small way, they will not be regulated by the Reserve Bank. Interestingly, this test is popularly
known as 50-50 test and is applied to determine whether or not a company is into financial business.

3. What is a Financial Asset?

Though the categorization of a company into an NBFC is majorly based on Financial Assets,
the term has neither been defined anywhere in the RBI Act nor it finds place in any circular,
notification, press release, etc. issued by RBI.

The term Financial Asset has been defined in para 11 of the Accounting Standard 32 issued by
Institute of Chartered Accountants of India, to mean as follows:

a)     Cash

b)     an equity instrument of another entity

c)     a contractual right:

(i)          to receive cash or another financial asset from another entity; or

(ii)        to exchange financial assets or financial liabilities with another entity under conditions that are
potentially favourable to the entity; or

d)     a contract that will or may be settled in the entity’s own equity instruments and is:

(i)          a non-derivative for which the entity is or may be obliged to receive a variable number of the
entity’s own equity instruments; or

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(ii)        a derivative that will or may be settled other than by the exchange of a fixed amount of cash or
another financial asset for a fixed number of the entity’s own equity instruments.

For this purpose the entity’s own equity instruments do not include puttable financial instruments
classified as equity instruments, instruments that impose on the entity an obligation to deliver to
another party a pro rata share of the net assets of the entity only on liquidation and are classified as
equity instruments, or instruments that are contracts for the future receipt or delivery of the entity’s
own equity instruments.

   Non- Reckoning Fixed Deposits with Banks as Financial Assets

 In this connection, it was clarified by RBI vide its circular dated 15th March, 2012 that the investments
in fixed deposits cannot be treated as financial assets and receipt of interest income on fixed deposits
with banks cannot be treated as income from financial assets as these are not covered under the
activities mentioned in the definition of “financial Institution” in Section 45I(c) of the RBI Act, 1934. It
was further clarified in the said circular that bank deposits constitute near money and can be used
only for temporary parking of idle funds, and/or in the above cases, till commencement of NBFI
business. Thus, investing in such assets does not amount to carrying the business of financial
institution.

Since bank FDs are no more treated as financial assets, they may escape one or both of the
conditions and thus escape the deeming provision which otherwise may have resulted in their
requiring to apply for registration as NBFC.

4. NBFCs are doing functions similar to banks. What is difference between banks & NBFCs?

NBFCs lend and make investments and hence their activities are akin to that of banks; however there
are a few differences as given below:

What is the Difference between Banks & NBFCs?

Here are the following differences between NBFC and Bank:

 Banks are the government authorized financial intermediary that aims at providing banking
services to the general people. Whereas NBFC provides banking services to people without
carrying a bank license.
 NBFC is incorporated under the Companies Act whereas a bank is registered under the
Banking Regulation Act, 1949.
 NBFCs are not allowed to accept deposits that are repayable on demand whereas banks
accepts demand deposits.
 In NBFC, foreign Investments up to 100% is allowed. Whereas in the case of private sector
banks they are eligible for foreign investment, but which would be no more than 74%.
 Banks are an integral part of the payment and settlement cycle while NBFC is not a part of
this system.
 It is mandatory for banks to maintain reserve ratios like CRR or SLR. Whereas in the case of
NBFC it is not required to maintain reserve ratios.
 Deposit insurance facility is allowed to the depositors by Deposit Insurance and Credit
Guarantee Corporation (DICGC)[2]. In the case of NBFC, this type of facility shall not be
available.
 Banks can create credit whereas in the case of NBFC they are not involved in the creation of
credit.
 Banks can provide transaction services to its customers such as providing overdraft facility,
issue of traveler’s cheque, transfer of funds, etc. Whereas these type of services cannot be
provided by NBFC.

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Comparison Chart

Basis NBFC Bank

Meaning They provide banking services to It is a government authorized financial

people without holding Bank intermediary which aims at providing banking
licenses. services to the public.

Regulated under Companies Act 2013 Banking Regulation Act 1949

Demand Deposit Cannot be accepted Can be accepted

Foreign Investment Allowed up to 100% Allowed up to 74% for private sector banks

Payment and Not a part of the system. An integral part of the system.
Settlement system

Maintenance of Not required Mandatory

Reserve Ratios

Deposit insurance Not available Available

facility

Credit creation NBFC does not create credit Banks create credit.

Transaction Cannot be provided by NBFC Provided by Banks

services

5. Is it necessary that every NBFC should be registered with RBI?

In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial company can commence or
carry on business of a non-banking financial institution without a) obtaining a certificate of registration
from the Bank and without having a Net Owned Funds of 100 crores. NBFCs which are regulated by
other regulators are exempted from the requirement of registration with RBI viz. Venture Capital
Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance
Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified
under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2
of the Chit Funds Act, 1982,Housing Finance Companies regulated by National Housing Bank, Stock
Exchange or a Mutual Benefit company.

6. What are the requirements for registration with RBI?

A company incorporated under the Companies Act, 1956 and desirous of commencing business of
non-banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should comply
with the following:

i. it should be a company registered under Section 3 of the companies Act, 1956

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ii. It should have a minimum net owned fund of 100 crores. (The minimum net owned fund (NOF)
required for specialized NBFCs like NBFC-MFIs, NBFC-Factors, CICs is indicated separately in the
FAQs on specialized NBFCs)

7. What is the procedure for application to the Reserve Bank for Registration?

The applicant company is required to apply online and submit a physical copy of the application along
with the necessary documents to the Regional Office of the Reserve Bank of India. The application
can be submitted online by accessing RBI’s secured website https://cosmos.rbi.org.in . At this stage,
the applicant company will not need to log on to the COSMOS application and hence user ids are not
required. The company can click on “CLICK” for Company Registration on the login page of the
COSMOS Application. A window showing the Excel application form available for download would be
displayed. The company can then download suitable application form (i.e. NBFC or SC/RC) from the
above website, key in the data and upload the application form. The company may note to indicate
the correct name of the Regional Office in the field “C-8” of the “Annex-I dentification Particulars” in
the Excel application form. The company would then get a Company Application Reference Number
for the CoR application filed on-line. Thereafter, the company has to submit the hard copy of the
application form (indicating the online Company Application Reference Number, along with the
supporting documents, to the concerned Regional Office. The company can then check the status of
the application from the above mentioned secure address, by keying in the acknowledgement
number.

8. What are systemically important NBFCs?

NBFCs whose asset size is of ₹ 500 cr or more as per last audited balance sheet are considered as
systemically important NBFCs. The rationale for such classification is that the activities of such
NBFCs will have a bearing on the financial stability of the overall economy.

Entities Regulated by RBI and applicable regulations

9. Does the Reserve Bank regulate all financial companies?

No. Merchant Banking Companies, Stock Exchanges, Companies engaged in the business of stock-
broking/sub-broking, Venture Capital Fund Companies, Nidhi Companies, Insurance companies and
Chit Fund Companies are NBFCs but they have been exempted from the requirement of registration
under Section 45-IA of the RBI Act, 1934 subject to certain conditions.

Merchant Banker/Venture Capital Fund Company/stock-exchanges/stock brokers/sub-brokers are

regulated by Securities and Exchange Board of India, and Insurance companies are regulated by
Insurance Regulatory and Development Authority. Similarly, Chit Fund Companies are regulated by
the respective State Governments and Nidhi Companies are regulated by Ministry of Corporate
Affairs, Government of India. Companies that do financial business but are regulated by other
regulators are given specific exemption by the Reserve Bank from its regulatory requirements for
avoiding duality of regulation.

Housing finance companies – an exemption which was granted to HFCs in 2019 was changed and
now a majority of Chapter III B applies to HFCs.

In October 22, 2020 - Review of regulatory framework for Housing Finance Companies (HFCs) was
undertaken. See new regulations applicable to HFCs.

In August 13, 2020 - Review of regulatory framework for All Core Investment Companies (CICs). See
New guidelines.

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It may also be mentioned that Mortgage Guarantee Companies have been notified as Non-Banking
Financial Companies under Section 45 I(f)(iii) of the RBI Act, 1934. Core Investment Companies with
asset size of less than ₹ 100 crore, and those with asset size of ₹ 100 crore and above but not
accessing public funds are exempted from registration with the RBI.

July 10, 2020

Exemption from Registration as NBFC – Alternative Investment Fund (AIF)

A reference is invited to para 5 of Master Directions on Exemptions from the provisions of RBI Act,
1934 dated August 25, 2016. Venture capital fund companies, holding a certificate of registration
obtained under section 12 of the Securities and Exchange Board of India Act, 1992 (Act 15 of 1992)
and not holding or accepting public deposit are exempted from the provisions of section 45-IA and 45-
IC of the RBI Act, 1934 and also from the applicability of guidelines issued by the Bank for NBFCs.

2. Consequent upon the repeal of Securities and Exchange Board of India (Venture Capital Funds)
Regulations, 1996 and enactment of Securities and Exchange Board of India (Alternative Investment
Funds) Regulations, 2012, it has been decided to substitute the word “Venture Capital Fund
Companies” with “Alternative Investment Fund Companies”, in exercise of the powers conferred under
section 45NC of RBI Act, 1934.

10. What are the different types/categories of NBFCs registered with RBI?

NBFCs are categorized a) in terms of the type of liabilities into Deposit and Non-Deposit accepting
NBFCs, b) non deposit taking NBFCs by their size into systemically important and other non-deposit
holding companies (NBFC-NDSI and NBFC-ND) and c) by the kind of activity they conduct. Within
this broad categorization the different types of NBFCs are as follows:

I. Asset Finance Company (AFC) : An AFC is a company which is a financial institution carrying on as
its principal business the financing of physical assets supporting productive/economic activity, such as
automobiles, tractors, lathe machines, generator sets, earth moving and material handling
equipments, moving on own power and general purpose industrial machines. Principal business for
this purpose is defined as aggregate of financing real/physical assets supporting economic activity
and income arising therefrom is not less than 60% of its total assets and total income respectively.

II. Investment Company (IC) : IC means any company which is a financial institution carrying on as its
principal business the acquisition of securities,

III. Loan Company (LC): LC means any company which is a financial institution carrying on as its
principal business the providing of finance whether by making loans or advances or otherwise for any
activity other than its own but does not include an Asset Finance Company.

IV. Infrastructure Finance Company (IFC): IFC is a non-banking finance company a) which deploys at
least 75 per cent of its total assets in infrastructure loans, b) has a minimum Net Owned Funds of ₹
300 crore, c) has a minimum credit rating of ‘A ‘or equivalent d) and a CRAR of 15%.

V. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an NBFC carrying on

the business of acquisition of shares and securities which satisfies the following conditions:-

(a) it holds not less than 90% of its Total Assets in the form of investment in equity shares, preference
shares, debt or loans in group companies;

(b) its investments in the equity shares (including instruments compulsorily convertible into equity
shares within a period not exceeding 10 years from the date of issue) in group companies constitutes
not less than 60% of its Total Assets;

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(c) it does not trade in its investments in shares, debt or loans in group companies except through
block sale for the purpose of dilution or disinvestment;

(d) it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI
act, 1934 except investment in bank deposits, money market instruments, government securities,
loans to and investments in debt issuances of group companies or guarantees issued on behalf of
group companies.

(e) Its asset size is ₹ 100 crore or above and

(f) It accepts public funds

VI. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) : IDF-NBFC is a company
registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise
resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only
Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.

VII. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-MFI is a non-
deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which
satisfy the following criteria:

a. loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding
₹ 1,00,000 or urban and semi-urban household income not exceeding ₹ 1,60,000;

b. loan amount does not exceed ₹ 50,000 in the first cycle and ₹ 1,00,000 in subsequent cycles;

c. total indebtedness of the borrower does not exceed ₹ 1,00,000;

d. tenure of the loan not to be less than 24 months for loan amount in excess of ₹ 15,000 with
prepayment without penalty;

e. loan to be extended without collateral;

f. aggregate amount of loans, given for income generation, is not less than 50 per cent of the total
loans given by the MFIs;

g. loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower

VIII. Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a non-deposit

taking NBFC engaged in the principal business of factoring. The financial assets in the factoring
business should constitute at least 50 percent of its total assets and its income derived from factoring
business should not be less than 50 percent of its gross income.

IX. Mortgage Guarantee Companies (MGC) - MGC are financial institutions for which at least 90% of
the business turnover is mortgage guarantee business or at least 90% of the gross income is from
mortgage guarantee business and net owned fund is ₹ 100 crore.

X. NBFC- Non-Operative Financial Holding Company (NOFHC) is financial institution through which
promoter / promoter groups will be permitted to set up a new bank .It’s a wholly-owned Non-Operative
Financial Holding Company (NOFHC) which will hold the bank as well as all other financial services
companies regulated by RBI or other financial sector regulators, to the extent permissible under the
applicable regulatory prescriptions.

February 22, 2019

Harmonisation of different categories of NBFCs

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Please refer to paragraph 5 of the Statement on Developmental and Regulatory Policies of the Sixth
Bi-monthly Monetary Policy Statement for 2018-19 dated February 07, 2019 on Harmonisation of
NBFC Categories.

2. Over a period of time, evolution of the NBFC sector has resulted in several categories of NBFCs
intended to focus on specific sector/ asset classes. Different sets of regulatory prescriptions were
accordingly put in place.

3. On a review, it has been decided that in order to provide NBFCs with greater operational flexibility,
harmonisation of different categories of NBFCs into fewer ones shall be carried out based on the
principle of regulation by activity rather than regulation by entity. Accordingly, it has been decided to
merge the three categories of NBFCs viz. Asset Finance Companies (AFC), Loan Companies (LCs)
and Investment Companies (ICs) into a new category called NBFC - Investment and Credit
Company (NBFC-ICC).

11. What are the powers of the Reserve Bank with regard to 'Non-Bank Financial Companies’,
that is, companies that meet the 50-50 Principal Business Criteria?

The Reserve Bank has been given the powers under the RBI Act 1934 to register, lay down policy,
issue directions, inspect, regulate, supervise and exercise surveillance over NBFCs that meet the 50-
50 criteria of principal business. The Reserve Bank can penalize NBFCs for violating the provisions of
the RBI Act or the directions or orders issued by RBI under RBI Act. The penal action can also result
in RBI cancelling the Certificate of Registration issued to the NBFC, or prohibiting them from
accepting deposits and alienating their assets or filing a winding up petition.

In 2019, a number of new provisions vis a vis regulating NBFCs was introduced to the RBI Act which
got amended

Chapter VI of the Finance (No.2) Act 2019 provides for amendments inter alia to the RBI Act 1934
with respect to Non-Banking Finance Companies (NBFCs). In addition to increasing the limit for their
net owned funds, the amendments empower the RBI to remove directors, supersede the Board, take
action against auditors and frame schemes of arrangement. These amendments have been
introduced in view of the issues arising from the ILFS imbroglio. The amendments have taken effect
from 9 August 2019.

The key amendments to the RBI Act 1934 undertaken in 2019 are as follows:

Limit of net owned funds enhanced to Rs. 100 crores from the existing limit of Rs. 2 crores. Different
amounts of net owned funds may be notified for different categories of NBFCs [Amendment to section
45-IA];

Power to remove Directors [new section 41-D] : The Bank may, if it is satisfied in the public interest or
to prevent the affairs of an NBFC being conducted in a manner detrimental to the depositors or
creditors, or for proper management of the company, remove from office a director of such company.
Government- owned NBFCs have been kept out of the purview of this power. Such director will be
given a reasonable opportunity of making a representation. Pending consideration of such
representation, if the Bank is of the opinion that a delay will adversely impact the company, it may, by
order, direct the director to cease to act as such and debar him from taking part in the management of
any other NBFC, whether directly or indirectly, for such period not exceeding five years at a time. If a
person is appointed in place of the removed director, he shall hold office for a period of up to three
years or such further period not exceeding three years at a time. Such person will not incur any
obligation or liability by reason of having acted in good faith in carrying out his duties as director. A
director who has been removed from office, as above, shall, notwithstanding any other law or
contract, memorandum or articles of association, not be entitled to claim any compensation for loss or
termination from office.

Power to order supersession of the Board of the NBFC (other than Government company) (new
section 45 -1E) : The Bank may for the same reasons as for the removal of a director from office,

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supersede the Board of directors of a company for a period of up to five years, extendable for up to a
period of five years. It may then appoint an Administrator for a certain period and issue directions to
the Administrator which he is bound to follow. The chairman, managing director, other directors will
vacate office from the date of supersession and the Administrator will discharge the duties of the
Board, with the assistance of a committee of experts, until a new Board is reconstituted.

Power to take action against auditors (new section 45MAA): Where an auditor fails to comply with any
direction or order issued by the Bank under section 45MA, the Bank may remove or debar the auditor
from exercising his duties as auditor from any Bank regulated entities, for a maximum period of three
years at a time.

Resolution of NBFC : After inspecting the books of accounts of the NBFC, the Bank may, in the public
interest or in the interest of financial stability, frame schemes of amalgamation, reconstruction or
splitting up of the viable and non-viable businesses of the NBFC to preserve the continuity of the
NBFC. For the latter, it may establish “Bridge Institutions” or temporary institutional arrangements.
The schemes referred to above may provide for reduction of pay and allowances of the CEO, MD,
Chairman or any senior management officer of the NBFC and cancellation of shares held by them or
their relatives or sale of assets of the NBFC. None of these persons will be entitled to any
compensation for loss incurred.

Power in respect of group companies (new section 45NAA): The Bank can direct the NBFC to annex
to its financial statement any information or statements related to the business of any of its group
companies. Group companies means two or more parties related to each other through a subsidiary,
joint venture, associate, promoter-promotee, related party, common brand name and investment in
equity shares of 20% or more in the entity.

Enhancement of penalties and fines for defaults committed by NBFCs : Penalties and fines for various
defaults committed by NBFCs and auditors under the Act have been significantly enhanced.

12. What action can be taken against persons/financial companies making false claim of being
regulated by the Reserve Bank?

It is illegal for any financial entity or unincorporated body to make a false claim of being regulated by
the Reserve Bank to mislead the public to collect deposits and is liable for penal action under the
Indian Penal Code. Information in this regard may be forwarded to the nearest office of the Reserve
Bank and the Police.

13. What action is taken if financial companies which are lending or making investments as
their principal business do not obtain a Certificate of Registration from the Reserve Bank?

If companies that are required to be registered with the Reserve Bank as NBFCs, are found to be
conducting non-banking financial activity, such as, lending, investment or deposit acceptance as their
principal business, without seeking registration, the Reserve Bank can impose penalty or fine on them
or can even prosecute them in a court of law. If members of public come across any entity which does
non-banking financial activity but does not figure in the list of authorized NBFC on RBI website, they
should inform the nearest Regional Office of the Reserve Bank, for appropriate action to be taken for
contravention of the provisions of the RBI Act, 1934.

14. Where can one find list of Registered NBFCs and instructions issued to NBFCs?

The list of registered NBFCs is available on the web site of Reserve Bank of India and can be viewed
at www.rbi.org.in → Sitemap → NBFC List. The instructions issued to NBFCs from time to time are
also hosted at www.rbi.org.in → Notifications → Master Circulars → Non-banking, besides, being
issued through Official Gazette notifications and press releases.

15. What are the regulations applicable on non-deposit accepting NBFCs with asset size of
less than ₹ 500 crore?

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The regulation on non-deposit accepting NBFCs with asset size of less than ₹ 500 crore would be as
under:

(i) They shall not be subjected to any regulation either prudential or conduct of business regulations
viz., Fair Practices Code (FPC), KYC, etc., if they have not accessed any public funds and do not
have a customer interface.

(ii) Those having customer interface will be subjected only to conduct of business regulations
including FPC, KYC etc., if they are not accessing public funds.

(iii) Those accepting public funds will be subjected to limited prudential regulations but not conduct of
business regulations if they have no customer interface.

(iv) Where both public funds are accepted and customer interface exist, such companies will be
subjected both to limited prudential regulations and conduct of business regulations.

16. What are the various prudential regulations applicable to NBFCs?

Master Circular - Prudential norms on Income Recognition, Asset Classification and

Provisioning pertaining to Advances – October 2021

Please refer to the Master Circular No. DBR.No.BP.BC.2/21.04.048/2015-16 dated July 1,

2015 consolidating instructions / guidelines issued to banks till June 30, 2015 on matters relating to
prudential norms on income recognition, asset classification and provisioning pertaining to advances.

All Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks)
excluding Payments Banks
All Primary (Urban) Co-operative Banks/State Co-operative Banks/District Central Co-operative Banks
All-India Financial Institutions (Exim Bank, NABARD, NHB and SIDBI)
All Non-Banking Financial Companies (including Housing Finance Companies)

Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to

Advances – Clarifications – Nov 12, 2021

Please refer to the Master Circular on Prudential norms on Income Recognition, Asset Classification
and Provisioning pertaining to Advances (IRACP norms) dated October 1, 2021. With a view to
ensuring uniformity in the implementation of IRACP norms across all lending institutions, certain
aspects of the extant regulatory guidelines are being clarified and/or harmonized, which will be
applicable mutatis mutandis to all lending institutions. Wherever references to circulars/instructions
applicable to banks have been made, other lending institutions may refer to instructions as applicable
to them. All the instructions in this circular, except those at paragraphs 2, 8-9 and 13, shall be
effective immediately from the date of this circular.

A. Specification of due date/repayment date

2. The extant instructions on IRACP norms specify that an amount is to be treated as overdue if it is
not paid on the due date fixed by the bank. It has been observed that due dates for repayments are
sometimes not specifically mentioned in the loan agreements, and instead a description of due dates
is mentioned, leaving scope for different interpretations. Henceforth, the exact due dates for
repayment of a loan, frequency of repayment, breakup between principal and interest, examples of
SMA/NPA classification dates, etc. shall be clearly specified in the loan agreement and the borrower
shall be apprised of the same at the time of loan sanction and also at the time of subsequent
changes, if any, to the sanction terms/loan agreement till full repayment of the loan. In cases of loan
facilities with moratorium on payment of principal and/or interest, the exact date of commencement of
repayment shall also be specified in the loan agreements. These instructions shall be complied with at
the earliest, but not later than December 31, 2021, in respect of fresh loans. In case of existing loans,
however, compliance to these instructions shall necessarily be ensured as and when such loans
become due for renewal/review.

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 B. Classification as Special Mention Account (SMA) and Non-Performing Asset (NPA) 1

3. The circular DBR.No.BP.BC.45/21.04.048/2018-19 dated June 7, 2019 on ‘Prudential Framework

for Resolution of Stressed Assets’ requires the lenders to recognize incipient stress in borrower
accounts, immediately on default, by classifying them as special mention accounts (SMA). In order to
remove any ambiguity, it is clarified that the intervals are intended to be continuous and accordingly,
the basis for classification of SMA categories shall be as follows:

Loans in the nature of revolving facilities

Loans other than revolving facilities
like cash credit/overdraft
SMA Sub- Basis for classification – SMA Sub- Basis for classification –
categories Principal or interest payment categories Outstanding balance remains
or any other amount wholly continuously in excess of the
or partly overdue sanctioned limit or drawing
power, whichever is lower, for a
period of:
SMA-0 Upto 30 days    
SMA-1 More than 30 days and upto SMA-1 More than 30 days and upto 60
60 days days
SMA-2 More than 60 days and upto SMA-2 More than 60 days and upto 90
90 days days

4. In the above context, it is further clarified that borrower accounts shall be flagged as overdue by the
lending institutions as part of their day-end processes for the due date, irrespective of the time of
running such processes. Similarly, classification of borrower accounts as SMA as well as NPA shall
be done as part of day-end process for the relevant date and the SMA or NPA classification date shall
be the calendar date for which the day end process is run. In other words, the date of SMA/NPA shall
reflect the asset classification status of an account at the day-end of that calendar date.

Example: If due date of a loan account is March 31, 2021, and full dues are not received before the
lending institution runs the day-end process for this date, the date of overdue shall be March 31,
2021. If it continues to remain overdue, then this account shall get tagged as SMA-1 upon running
day-end process on April 30, 2021 i.e. upon completion of 30 days of being continuously overdue.
Accordingly, the date of SMA-1 classification for that account shall be April 30, 2021.

Similarly, if the account continues to remain overdue, it shall get tagged as SMA-2 upon running day-
end process on May 30, 2021 and if continues to remain overdue further, it shall get classified as
NPA upon running day-end process on June 29, 2021.

5. It is further clarified that the instructions on SMA classification of borrower accounts are applicable
to all loans2, including retail loans, irrespective of size of exposure of the lending institution.

C. Clarification regarding definition of ‘out of order’

6. Cash credit/Overdraft (CC/OD) account is classified as NPA if it is ‘out of order’. In cases where the
outstanding balance in the principal operating account is less than the sanctioned limit/drawing power,
the extant instructions, inter alia, stipulate that the account should be treated as ‘out of order’ if there
are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to
cover the interest debited during the same period. In order to avoid any ambiguity regarding
determination of ‘out of order’ status of CC/OD accounts on a continuous basis, it is clarified that an
account shall be treated as ‘out of order’ if:

i. the outstanding balance in the CC/OD account remains continuously in excess of the
sanctioned limit/drawing power for 90 days, or

ii. the outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power
but there are no credits continuously for 90 days, or the outstanding balance in the CC/OD account is

10
less than the sanctioned limit/drawing power but credits are not enough to cover the interest debited
during the previous 90 days period.

7. Accordingly, treatment of CC/OD accounts as ‘out of order’ on or after the date of this circular shall
be based on the above instructions.

D. NPA classification in case of interest payments

8. In terms of paragraph 2.1.3 of the Master Circular on IRACP norms dated October 1, 2021, in case
of interest payments, an account is classified as NPA only if the interest due and charged during any
quarter is not serviced fully within 90 days from the end of the quarter. In order to fully align with the
90 days delinquency norm as well as the requirement to apply interest at monthly rests, the above
instructions are modified as under:

In case of interest payments in respect of term loans, an account will be classified as NPA if the
interest applied at specified rests remains overdue for more than 90 days.

9. These instructions shall be effective from March 31, 2022. Accordingly, in respect of any borrower
account which becomes overdue on or after March 31, 2022, its classification as NPA shall be based
on the account being overdue for more than 90 days.

E. Upgradation of accounts classified as NPAs

10. It has been observed that some lending institutions upgrade accounts classified as NPAs to
‘standard’ asset category upon payment of only interest overdues, partial overdues, etc. In order to
avoid any ambiguity in this regard, it is clarified that loan accounts classified as NPAs may be
upgraded as ‘standard’ asset only if entire arrears of interest and principal are paid by the borrower.
With regard to upgradation of accounts classified as NPA due to restructuring, non-achievement of
date of commencement of commercial operations (DCCO), etc., the instructions as specified for such
cases shall continue to be applicable.

F. Income recognition policy for loans with moratorium on payment of interest

11. In cases of loans where moratorium has been granted for repayment of interest, lending
institutions may recognize interest income on accrual basis for accounts which continue to be
classified as ‘standard’. This shall be evaluated against the definition of ‘restructuring’ provided in
paragraph 1 of the Annex-1 to the above-mentioned ‘Prudential Framework for Resolution of Stressed
Assets’ dated June 7, 2019. However, income recognition norms for loans towards projects under
implementation involving deferment of DCCO3 and gold loans for non-agricultural purposes4 shall
continue to be governed as per the existing instructions.

12. The extant instructions (compiled at paragraph 3.2 of the Master Circular on IRACP norms dated
October 1, 2021) require that once an account is classified as NPA, the entire interest accrued and
credited to income account in the past periods, must be reversed to the extent it remains unrealised. It
is clarified that if loans with moratorium on payment of interest (permitted at the time of sanction of the
loan) become NPA after the moratorium period is over, the capitalized interest corresponding to the
interest accrued during such moratorium period need not be reversed.

G. Consumer Education

13. With a view to increasing awareness among the borrowers, lending institutions shall place
consumer education literature on their websites, explaining with examples, the concepts of date of
overdue, SMA and NPA classification and upgradation, with specific reference to day-end process.
Lending institutions may also consider displaying such consumer education literature in their branches
by means of posters and/or other appropriate media. Further, it shall also be ensured that their front-
line officers educate borrowers about all these concepts, with respect to loans availed by them, at the
time of sanction/disbursal/renewal of loans. These instructions shall be complied with at the earliest,
but not later than March 31, 2022.

11
 17. Meaning of the terms ‘owned fund’ and ‘net owned fund’ in relation to NBFCs?

‘Owned Fund’ means aggregate of the paid-up equity capital, preference shares which are
compulsorily convertible into equity, free reserves, balance in share premium account and capital
reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by
revaluation of asset, after deducting therefrom accumulated balance of loss, deferred revenue
expenditure and other intangible assets. 'Net Owned Fund' is the amount as arrived at above, minus
the amount of investments of such company in shares of its subsidiaries, companies in the same
group and all other NBFCs and the book value of debentures, bonds, outstanding loans and advances
including hire purchase and lease finance made to and deposits with subsidiaries and companies in
the same group, to the extent it exceeds 10% of the owned fund.

18. What are the responsibilities of the NBFCs registered with Reserve Bank, with regard to
submission on compliances and other information?

A. Returns to be submitted by deposit taking NBFCs

1. NBS-1 Quarterly Returns on deposits in First Schedule.

2. NBS-2 Quarterly return on Prudential Norms is required to be submitted by NBFC accepting
public deposits.
3. NBS-3 Quarterly return on Liquid Assets by deposit taking NBFC.
4. NBS-4 Annual return of critical parameters by a rejected company holding public deposits.
(NBS-5 stands withdrawn as submission of NBS 1 has been made quarterly.)
5. NBS-6 Monthly return on exposure to capital market by deposit taking NBFC with total assets
of ₹ 100 crore and above.
6. Half-yearly ALM return by NBFC holding public deposits of more than ₹ 20 crore or asset
size of more than ₹ 100 crore
7. Audited Balance sheet and Auditor’s Report by NBFC accepting public deposits.
8. Branch Info Return.

B. Returns to be submitted by NBFCs-ND-SI

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

C. Quarterly return on important financial parameters of non deposit taking NBFCs having
assets of more than ₹ 50 crore and above but less than ₹ 100 crore

Basic information like name of the company, address, NOF, profit / loss during the last three years
has to be submitted quarterly by non-deposit taking NBFCs with asset size between ₹ 50 crore and ₹
100 crore.

There are other generic reports to be submitted by all NBFCs as elaborated in Master Circular on
Returns to be submitted by NBFCs as available on www.rbi.org.in → Notifications → Master Circulars
→ Non-banking and Circular DNBS (IT) CC.No.02/24.01.191/2015-16 dated July 9, 2015 as available
on www.rbi.org.in → Notifications.

What are the Post Incorporation NBFC Compliances?

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After receiving a COR from the Reserve Bank of India, it is required for all the Non banking financial

companies to become a member of all Credit Information Companies i.e.

Registration to become a member of CIC

On the basis of data provided by the member banks of CIC and other financial institution credit

information companies prepare a Credit information report and on that basis is Company credit Report

prepared for credit rating. In India, these 4 below mentioned companies are treated as credit

information companies.

 CIBIL-Credit Information Bureau India Limited

CIBIL was launched as India’s first Credit Bureau, an individual can log onto the CIBIL website[1] and

fill in the required details in the online form can then get his/her credit score and report on his/her

registered email id.

 Equifax Credit Information Services Private Limited

Equifax has listed its services in India in the year 2010 and has recorded a magnificent growth by

assembling and assimilating the record of an individual’s financial data and also helps in managing

the financial profiles of individual consumers.

 Experian Credit Information Company of India Private Limited

Experian is helpful to do a credit check on the consumers and reflects the probability of a consumer

paying back capacity of his loan and credit.

 CRIF High Mark Credit Information Services Private Limited

CRIF High Mark earlier known as High Mark ensures that there are no defaults in the future and the

customer is creditworthy, mostly banks and lenders prefer to go to credit rating companies.

FIU-IND Registration

Financial Intelligence registration is required for every NBFCs post incorporation and has to report

their client details as per the prescribed requirement under the Prevention of Money Laundering

Act. FIU-IND registration provides quality financial intelligence for safeguarding the financial system

from terrorism-financing and other offenses including money laundering.

13
The main objective of FIU-IND is to receive suspicious transaction reports and disseminate valuable

financial information by collecting and analyzing the information. It acts as a Central Repository and

maintains the national data on cash and suspicious transaction on the basis of the reports received

from the entities who are reporting.

Central KYC Registration

Central KYC registration is one of the most important NBFC compliances to be done by the NBFCs

and rapidly getting adopted by the companies in India. CKYC is termed as a centralized repository

which collects the records for the customers in financial services. CERSAI (Central Registry of

Securitization and Asset Reconstruction and Security Interest in India) is the registry for the Central

KYC.

All the entities required to be registered and regulated from Reserve Bank of India i.e. NBFCs are

required to take registration of Central KYC to reduce the burden of the entity by producing and

assembling the documents of the consumers creating a new relationship with the financial entity.

NBS-9-Filling of Return with RBI

NBS-9 is required to be filed by the NBFCs -ND whose asset size is less than Rs 100 crore.

Due date of filing – Within 60 days from the end of the financial year

Annual Compliance to be done by the NBFC

NBFCs have to comply with the following requirements as Annual NBFC compliances

 Reporting of Financial Statements and change in management.

 Maintenance of Statutory Registers
 Auditing of financial accounts.

NBFC Compliances followed by the company annually

 NBS-7 Unaudited March monthly return- On or before 30 th June

 NBS-7 Audited March monthly return-Upon Completion.
 NBS-4 filled on an annual basis to find the repayment status of the rejected NBFCs accepting
public deposits
 Detail Information about the companies having FDI/Foreign Funds-On or Before 30 th June.
 Filing of audited Balance sheet and P&L-1 Month from the date of signing.
 Declaration of Auditors to Act as Auditors of the Company.

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  Before the commencement of the new Financial year, Resolution of Non-Acceptance of
Public Deposit.

19. NBFCs are charging high interest rates from their borrowers. Is there any ceiling on
interest rate charged by the NBFCs to their borrowers?

Reserve Bank of India has deregulated interest rates to be charged to borrowers by financial
institutions (other than NBFC- Micro Finance Institution). The rate of interest to be charged by the
company is governed by the terms and conditions of the loan agreement entered into between the
borrower and the NBFCs. However, the NBFCs have to be transparent and the rate of interest and
manner of arriving at the rate of interest to different categories of borrowers should be disclosed to the
borrower or customer in the application form and communicated explicitly in the sanction letter etc.

D. Definition of deposits, Eligible / Ineligible Institutions to accept deposits and Related

Matters

20. What is ‘deposit’ and ‘public deposit’? Is it defined anywhere?

The term ‘deposit’ is defined under Section 45 I(bb) of the RBI Act, 1934. ‘Deposit’ includes and shall
be deemed always to have included any receipt of money by way of deposit or loan or in any other
form but does not include:

i. amount raised by way of share capital, or contributed as capital by partners of a firm;

ii. amount received from a scheduled bank, a co-operative bank, a banking company, Development
bank, State Financial Corporation, IDBI or any other institution specified by RBI;

iii. amount received in ordinary course of business by way of security deposit, dealership deposit,
earnest money, advance against orders for goods, properties or services;

iv. amount received by a registered money lender other than a body corporate;

v. amount received by way of subscriptions in respect of a ‘Chit’.

Paragraph 2(1)(xii) of the Non-Banking Financial Companies Acceptance of Public Deposits

( Reserve Bank) Directions, 1998 defines a ‘ public deposit’ as a ‘deposit’ as defined under Section 45
I(bb) of the RBI Act, 1934 and further excludes the following:

a. amount received from the Central/ State Government or any other source where repayment is
guaranteed by Central/ State Government or any amount received from local authority or foreign
government or any foreign citizen/ authority/ person;

b. any amount received from financial institutions specified by RBI for this purpose;

c. any amount received by a company from any other company;

d. amount received by way of subscriptions to shares, stock, bonds or debentures pending allotment
or by way of calls in advance if such amount is not repayable to the members under the articles of
association of the company;

15
e. amount received from directors of a company or from its shareholders by private company or by a
private company which has become a public company;

f. amount raised by issue of bonds or debentures secured by mortgage of any immovable property or
other asset of the company subject to conditions;

fa. any amount raised by issuance of non-convertible debentures with a maturity more than one year
and having the minimum subscription per investor at ₹ 1 crore and above, provided it is in accordance
with the guidelines issued by the Bank.

g. the amount brought in by the promoters by way of unsecured loan;

h. amount received from a mutual fund;

i. any amount received as hybrid debt or subordinated debt;

j. amount received from a relative of the director of an NBFC;

k. any amount received by issuance of Commercial Paper.

l. any amount received by a systemically important non-deposit taking non-banking financial company
by issuance of ‘perpetual debt instruments’

m. any amount raised by the issue of infrastructure bonds by an Infrastructure Finance Company

Thus, the directions exclude from the definition of public deposit, amount raised from certain set of
informed lenders who can make independent decision.

See definition of “financial institution” under Section 45 -I (c)

21. Which entities can legally accept deposits from public?

Banks, including co-operative banks, can accept deposits. Non-bank finance companies, which have
been issued Certificate of Registration by RBI with a specific licence to accept deposits, are entitled to
accept public deposit. In other words, not all NBFCs registered with the Reserve Bank are entitled to
accept deposits but only those that hold a deposit accepting Certificate of Registration can accept
deposits. They can, however, accept deposits, only to the extent permissible. Housing Finance
Companies, which are again specifically authorized to collect deposits and companies authorized by
Ministry of Corporate Affairs under the Companies Acceptance of Deposits Rules framed by Central
Government under the Companies Act can also accept deposits also upto a certain limit. Cooperative
Credit Societies can accept deposits from their members but not from the general public. The Reserve
Bank regulates the deposit acceptance only of banks, cooperative banks and NBFCs.

It is not legally permissible for other entities to accept public deposits. Unincorporated bodies like
individuals, partnership firms, and other association of individuals are prohibited from carrying on the
business of acceptance of deposits as their principal business. Such unincorporated bodies are
prohibited from even accepting deposits if they are carrying on financial business.

22. Can all NBFCs accept deposits? Is there any ceiling on acceptance of Public Deposits?
What is the rate of interest and period of deposit which NBFCs can accept?

All NBFCs are not entitled to accept public deposits. Only those NBFCs to which the Bank had given
a specific authorisation and have an investment grade rating are allowed to accept/ hold public
deposits to a limit of 1.5 times of its Net Owned Funds. All existing unrated AFCs that have been
allowed to accept deposits shall have to get themselves rated by March 31, 2016. Those AFCs that
do not get an investment grade rating by March 31, 2016, will not be allowed to renew existing or
accept fresh deposits thereafter. In the intervening period, i.e. till March 31, 2016, unrated AFCs or

16
those with a sub-investment grade rating can only renew existing deposits on maturity, and not accept
fresh deposits, till they obtain an investment grade rating.

They cannot accept deposits repayable on demand.

23. In respect of companies which do not fulfill the 50-50 criteria but are accepting deposits –
do they come under RBI purview?

A company which does not have financial assets which is more than 50% of its total assets and does
not derive at least 50% of its gross income from such assets is not an NBFC. Its principal business
would be non-financial activity like agricultural operations, industrial activity, purchase or sale of goods
or purchase/construction of immoveable property, and will be a non-banking non-financial company.
Acceptance of deposits by a Non-Banking Non-Financial Company are governed by the rules and
regulations issued by the Ministry of Corporate Affairs.

24. Why is the RBI so restrictive in allowing NBFCs to raise public deposits?

The Reserve Bank's overarching concern while supervising any financial entity is protection of
depositors' interest. Depositors place deposit with any entity on trust unlike an investor who invests in
the shares of a company with the intention of sharing the risk as well as return with the promoters.
Protection of depositors' interest thus is supreme in financial regulation. Banks are the most regulated
financial entities. The Deposit Insurance and Credit Guarantee Corporation pays insurance on
deposits up to ₹ One lakh in case a bank failed.

25. Which are the NBFCs specifically authorized by RBI to accept deposits?

The Reserve Bank publishes the list of NBFCs that hold a valid Certificate of Registration for
accepting deposits on its website: www.rbi.org.in → Sitemap → NBFC List → List of NBFCs Permitted
to Accept Deposits. At times, some companies are temporarily prohibited from accepting public
deposits. The Reserve Bank publishes the list of NBFCs temporarily prohibited also on its website.
The Reserve Bank keeps both these lists updated. Members of the public are advised to check both
these lists before placing deposits with NBFCs.

26. Whether NBFCs can accept deposits from NRIs?

Effective from April 24, 2004, NBFCs cannot accept deposits from NRIs except deposits by debit to
NRO account of NRI provided such amount does not represent inward remittance or transfer from
NRE/FCNR (B) account. However, the existing NRI deposits can be renewed.

27. Can a Co-operative Credit Society accept deposits from the public?

No. Co-operative Credit Societies cannot accept deposits from general public. They can accept
deposits only from their members within the limit specified in their bye laws.

28. Can a Salary Earners’ Society accept deposits from the public?

No. These societies are formed for salaried employees and hence they can accept deposit only from
their own members and not from general public.

29. Is nomination facility available to the Depositors of NBFCs?

Yes, nomination facility is available to the depositors of NBFCs. The Rules for nomination facility are
provided for in section 45QB of the Reserve Bank of India Act, 1934. Non-Banking Financial
Companies have been advised to adopt the Banking Companies (Nomination) Rules, 1985 made
under Section 45ZA of the Banking Regulation Act, 1949. Accordingly, depositor/s of NBFCs are
permitted to nominate one person to whom the NBFC can return the deposit in the event of the death
of the depositor/s. NBFCs are advised to accept nominations made by the depositors in the form

17
similar to one specified under the said rules, viz Form DA 1 for the purpose of nomination, and Form
DA2 and DA3 for cancellation of nomination and change of nomination respectively.

30. How does the Reserve Bank come to know about unauthorized acceptance of deposits by
companies not registered with it or of NBFCs engaged in lending or investment activities
without obtaining the Certificate of Registration from it?

NBFCs that ought to have sought registration from RBI but are functioning without doing so are
committing a breach of law. Such companies are liable for action as envisaged under the RBI Act,
1934. To identify such entities, RBI has multiple sources of information. These include market
intelligence, complaints received from affected parties, industry sources, and exception reports
submitted by statutory auditors in terms of Non-Banking Financial Companies Auditor’s Report
(Reserve Bank) Directions, 2008. Further, the State Level Co-ordination Committees (SLCC) is
convened by RBI in all the States/UTs on quarterly basis. The SLCC is now chaired by the Chief
Secretary/ Administrator of the concerned State/UT and has, as its members, apart from the Reserve
Bank, the Regional Directorate of the MCA/ ROC, local unit of SEBI, NHB, Registrar of Chits, ICAI,
Economic Intelligence Unit of the State Police and officials from Law and Home Ministries of the State
Government. As all the relevant financial sector regulators and enforcement agencies participate in
the SLCC, it is possible to quickly share the information and agree on an effective course of action to
be taken against entities indulging in unauthorized and suspect businesses involving funds
mobilization from public.

31. Can Proprietorship/Partnership Concerns associated/not associated with registered

NBFCs accept public deposits?

No. Proprietorship and partnership concerns are un-incorporated bodies. Hence they are prohibited
under the RBI Act 1934 from accepting public deposits.

32. There are many jewellery shops taking money from the public in instalments. Is this
amounting to acceptance of deposits?

It depends on whether the money is received as advance for delivering jewellery at a future date or
whether the money is received with a promise to return the same with interest. The money accepted
by Jewellery shops in instalments for the purpose of delivering jewellery at the end of the period of
contract is not deposit. It will amount to acceptance of deposits if in return for the money received, the
jewellery shop promises to return the principal amount along with interest.

33. What action can be taken if such unincorporated entities accept public deposits? What if
NBFCs which have not been authorized to accept public deposits use
proprietorship/partnership firms floated by their promoters to collect deposits?

Such unincorporated entities, if found accepting public deposits, are liable for criminal action. Further
NBFCs are prohibited by RBI from associating with any unincorporated bodies. If NBFCs associate
themselves with proprietorship/partnership firms accepting deposits in contravention of RBI Act, they
are also liable to be prosecuted under criminal law or under the Protection of Interest of Depositors (in
Financial Establishments) Act, if passed by the State Governments.

34. What is the difference between acceptance of money by Chit Funds and acceptance of
deposits?

Deposits are defined under the RBI Act 1934 as acceptance of money other than that raised by way
of share capital, money received from banks and other financial institutions, money received as
security deposit, earnest money and advance against goods or services and subscriptions to chits. All
other amounts, received as loan or in any form are treated as deposits. Chit Funds activity involves
contributions by members in instalments by way of subscription to the Chit and by rotation each
member of the Chit receives the chit amount. The subscriptions are specifically excluded from the
definition of deposits and cannot be termed as deposits. While Chit funds may collect subscriptions as
above, they are prohibited by RBI from accepting deposits with effect from August 2009.

18
 E. Depositor Protection Issues

35. What are the salient features of NBFC regulations which the depositor may note at the time
of investment?

Some of the important regulations relating to acceptance of deposits by NBFCs are as under:

i. They cannot accept deposits repayable on demand.

ii. NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
iii. NBFCs should have minimum investment grade credit rating.
iv. The deposits with NBFCs are not insured.
v. The repayment of deposits by NBFCs is not guaranteed by RBI.
vi. Certain mandatory disclosures are to be made about the company in the Application Form
issued by the company soliciting deposits.

36. What precautions should a depositor take before placing deposit with an NBFC?

A depositor wanting to place deposit with an NBFC must take the following precautions before placing
deposits:

i. That the NBFC is registered with RBI and specifically authorized by the RBI to accept
deposits. A list of deposit taking NBFCs entitled to accept deposits is available at www.rbi.org.in →
Sitemap → NBFC List. The depositor should check the list of NBFCs permitted to accept public
deposits and also check that it is not appearing in the list of companies prohibited from accepting
deposits, which is available at www.rbi.org.in → Sitemap → NBFC List → NBFCs who have been
issued prohibitory orders, winding up petitions filed and legal cases under Chapter IIIB, IIIC and
others.
ii. NBFCs have to prominently display the Certificate of Registration (CoR) issued by the
Reserve Bank on its site. This certificate should also reflect that the NBFC has been specifically
authorized by RBI to accept deposits. Depositors must scrutinize the certificate to ensure that the
NBFC is authorized to accept deposits.
iii. The Reserve Bank keeps altering the interest rates depending on the macro-economic
environment. The Reserve Bank publishes the change in the interest rates on www.rbi.org.in →
Sitemap → NBFC List → FAQs.
iv. The depositor must insist on a proper receipt for every amount of deposit placed with the
company. The receipt should be duly signed by an officer authorized by the company and should
state the date of the deposit, the name of the depositor, the amount in words and figures, rate of
interest payable, maturity date and amount.
v. In the case of brokers/agents etc collecting public deposits on behalf of NBFCs, the
depositors should satisfy themselves that the brokers/agents are duly authorized by the NBFC.
vi. The depositor must bear in mind that public deposits are unsecured and Deposit Insurance
facility is not available to depositors of NBFCs.
vii. The Reserve Bank of India does not accept any responsibility or guarantee about the present
position as to the financial soundness of the company or for the correctness of any of the statements
or representations made or opinions expressed by the company and for repayment of
deposits/discharge of the liabilities by the company.

37. Does RBI guarantee the repayment of the deposits collected by NBFCs?

No. The Reserve Bank does not guarantee repayment of deposits by NBFCs even though they may
be authorized to collect deposits. As such, investors and depositors should take informed decisions
while placing deposit with an NBFC.

38. In case an NBFC defaults in repayment of deposit what course of action can be taken by
depositors?

19
If an NBFC defaults in repayment of 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 procedure as indicated in reply to question 57 below. Further, at the
level of the State Government, the State Legislations on Protection of Interest of Depositors (in
Financial Establishments) empowers the State Governments to take action even before the default
takes place or complaints are received from depositors. If there is perpetration of an offence and if the
intention is to defraud, the State Government can even attach properties.

39. What is the role of Company Law Board in protecting the interest of depositors? How can
one approach it?

When an NBFC fails to repay any deposit or part thereof in accordance with the terms and conditions
of such deposit, the Company Law Board (CLB) either on its own motion or on an application from the
depositor, directs by order the Non-Banking Financial Company to make repayment of such deposit or
part thereof forthwith or within such time and subject to such conditions as may be specified in the
order. After making the payment, the company will need to file the compliance with the local office of
the Reserve Bank of India.

As explained above, the depositor can approach CLB by mailing an application in prescribed form to
the appropriate bench of the Company Law Board according to its territorial jurisdiction along with the
prescribed fee.

40. Addresses of the various benches of the Company Law Board (CLB) indicating their
respective jurisdiction?

The details of addresses and territorial jurisdiction of the bench officers of CLB are as under:

S. Benches Jurisdiction Telephone

No. No.
1. Company Law Board All States & Union Territories 011 –
Principal Bench 24366126
Paryavaran Bhawan
B-Block, 3rd Floor
C.G.O. Complex
Lodhi Road,New Delhi
– 110 003
2. Company Law Board States of Delhi, Haryana, 011 –
New Delhi Bench Himachal Pradesh, Jammu & 24363671,
Paryavaran Bhawan Kashmir, Punjab, Rajasthan, Uttar 011 –
B-Block, 3rd Floor Pradesh, Uttarakhand and Union 24362324
C.G.O. Complex Territories of Chandigarh.
Lodhi Road,New Delhi
– 110 003
3. Company Law Board States of Arunachal Pradesh, 033 –
Kolkata Bench Assam, Bihar, Manipur, 22486330
5, Esplande Meghalaya, Nagaland, Orissa,
Row(West) Sikkim, Tripura, West Bengal,
Kolkata – 700 001 Jharkhand and Union Territories of
Andaman and Nicobar Island and
Mizoram.
4. Company Law Board States of Goa, Gujarat, Madhya 022 –
Mumbai Bench Pradesh, Maharashtra, 22619636
N.T.C. House, 2ND Chhattisgarh and (Union
Floor, Territories of Dadra and Nagar
15 Narottam Morarjee Haveli and Damman and Diu)
Marg,
Ballard Estate,
Mumbai – 400 038

20
 5. Company Law Board, States of Andhra Pradesh, 044 –
Chennai Bench Karnataka, Kerala, Tamil Nadu 25262791
Corporate Bhawan and Union Territories of
(UTI Building), Pondicherry and Lakshadweep
3rd Floor, No. 29 Island.
Rajaji Salari,
Chennai – 600001.

41. We hear that in a number of cases Official Liquidators have been appointed on the
defaulting NBFCs. What is the procedure adopted by the Official Liquidator?

An Official Liquidator is appointed by the court after giving the company reasonable opportunity of
being heard in a winding up petition. The liquidator performs the duties of winding up of the company
and such duties in reference thereto as the court may impose. Where the court has appointed an
official liquidator or provisional liquidator, he becomes custodian of the property of the company and
runs day-to-day affairs of the company. He has to draw up a statement of affairs of the company in
prescribed form containing particulars of assets of the company, its debts and liabilities,
names/residences/occupations of its creditors, the debts due to the company and such other
information as may be prescribed. The scheme is drawn up by the liquidator and same is put up to the
court for approval. The liquidator realizes the assets of the company and arranges to repay the
creditors according to the scheme approved by the court. The liquidator generally inserts
advertisement in the newspaper inviting claims from depositors/investors in compliance with court
orders. Therefore, the investors/depositors should file the claims within due time as per such notices
of the liquidator. The Reserve Bank also provides assistance to the depositors in furnishing addresses
of the official liquidator.

42. The Consumer Court plays useful role in attending to depositors problems. Can one
approach Consumer Forum, Civil Court, CLB simultaneously?

Yes, a depositor can approach any or all of the redressal authorities i.e consumer forum, court or
CLB.

43. Is there an Ombudsman for hearing complaints against NBFCs or Does RBI have any
grievance redressal mechanism in place for NBFCs?

The Reserve Bank of India has introduced an Ombudsman Scheme for customers of Non-Banking
Financial Companies (NBFCs). The Ombudsman Scheme for Non-Banking Financial Companies,
2018 (the Scheme), is an expeditious and cost free apex level mechanism for resolution of complaints
of customers of NBFCs, relating to certain services rendered by NBFCs. The Scheme is being
introduced under Section 45 L of the Reserve Bank of India Act, 1934, with effect from February 23,
2018.

1. Who is the NBFC Ombudsman?

The NBFC Ombudsman is a senior official appointed by the Reserve Bank of India to redress
customer complaints against NBFCs for deficiency in certain services covered under the grounds of
complaint specified under Clause 8 of the Scheme.

2. How many NBFC Ombudsman have been appointed and where are they located?

As on date, four NBFC Ombudsman have been appointed with their offices located at Chennai,
Kolkata, New Delhi and Mumbai. The addresses, contact details and territorial jurisdiction of the
Ombudsman is provided in the Annex I of the Scheme.

3. Which are the NBFCs covered under the Scheme?

21
NBFCs, as defined in Section 45-I (f) of the Reserve Bank of India Act, 1934 and registered with the
RBI under Section 45-IA of the Reserve Bank of India Act, 1934, which (a) are authorised to accept
deposits; or (b) have customer interface, with assets size of one billion rupees or above, as on the
date of the audited balance sheet of the previous financial year, or of any such asset size as the RBI
may prescribe, are covered under the Scheme. The Scheme initially covers NBFCs authorized to
accept deposits, and would be gradually extended to cover other identified NBFCs.

4. What are the grounds of complaints?

As per Clause 8 of the Scheme, the NBFC Ombudsman can receive and consider any complaint on
the following grounds:

a. non-payment or inordinate delay in the payment of interest on deposits;

b. non-adherence to the Reserve Bank directives, if any, applicable to rate of interest on

deposits;

c. non-repayment or inordinate delay in the repayment of deposits;

d. non-presentation or inordinate delay in the presentation of post-dated cheques provided by

the customer;

e. failure to convey in writing, the amount of loan sanctioned along with terms and conditions
including annualised rate of interest and method of application thereof;

f. failure or refusal to provide sanction letter/ terms and conditions of sanction in vernacular
language or a language as understood by the borrower;

g. failure or refusal to provide adequate notice on proposed changes being made in sanctioned
terms and conditions in vernacular language as understood by the borrower;

h. failure or inordinate delay in releasing the securities/ documents to the borrower on

repayment of all dues;

i. levying of charges without adequate prior notice to the borrower/customer;

j. failure to provide legally enforceable built-in repossession clause in the contract/ loan
agreement;

k. failure to ensure transparency in the contract/ loan agreement regarding (i) notice period
before taking possession of security; (ii) circumstances under which the notice period can be
waived; (iii) the procedure for taking possession of the security; (iv) provision of final chance to
be given to the borrower for repayment of loan before the sale/ auction of the security; (v) the
procedure for giving repossession to the borrower and (vi) the procedure for sale/ auction of the
security;

l. non-observance of directions issued by Reserve Bank to the NBFCs;

m. non-adherence to any of the other provisions of Reserve Bank Guidelines on Fair Practices
Code for NBFCs.

The Ombudsman may also deal with such other matter as may be specified by the Reserve Bank
from time to time.

5. When can one file a complaint?

22
For redressal of grievance, the complainant must first approach the concerned NBFC. If the NBFC
does not reply within a period of one month after receipt of the complaint, or the NBFC rejects the
complaint, or if the complainant is not satisfied with the reply given by the NBFC, the complainant can
file the complaint with the NBFC Ombudsman under whose jurisdiction the branch/ registered office of
the NBFC falls.

44. Internal Ombudsman

November 15, 2021

Applies to

a) NBFCs-D with 10 or more branches, and

b) NBFCs-ND with asset size of Rs 5,000 crore and above (excluding NBFCs given in para 3 of the
direction)

Appointment of Internal Ombudsman by Non-Banking Financial Companies

In exercise of the powers conferred by Section 45 (L) read with 45 (M) of the Reserve Bank of India
Act, 1934, Reserve Bank of India (RBI) being satisfied that it is in public interest and in the interest of
conduct of business relating to Non-Banking Financial Companies (NBFCs), directs NBFCs registered
with RBI under Section 45-IA of the RBI Act, 1934, fulfilling the criteria given below, to appoint an
Internal Ombudsman (IO).

2. NBFCs fulfilling the following criteria as on date would be required to appoint the IO:

a) Deposit-taking NBFCs (NBFCs-D) with 10 or more branches.

b) Non-Deposit taking NBFCs (NBFCs-ND) with asset size of Rs.5,000 crore and above and having
public customer interface.

3. The following types of NBFCs will be excluded from the applicability of this direction:

a. Stand-alone Primary Dealer;

b. Non-Banking Financial Company - Infrastructure Finance Company (NBFC-IFC);

c. Core Investment Company (CIC);

d. Infrastructure Debt Fund - Non-Banking Financial Company (IDF-NBFC);

e. Non-Banking Financial Company – Account Aggregator (NBFC-AA);

f. NBFC under Corporate Insolvency Resolution Process;

g. NBFC in liquidation;

h. NBFC having only captive customers.

4. An NBFC shall be required to comply with the provisions of this direction as follows:

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 a) NBFC fulfilling the criteria (para 2 above) as on date - within six months;

b) NBFC fulfilling the criteria post issue of this direction and NBFC commencing operations after the
issue of this direction – within six months of attaining the specified criteria, as may be applicable.

5. Any NBFC which is covered by this direction shall continue to have an IO for a period of three years
after the company falls below the thresholds (para 2 above). If the term of the incumbent IO ends
before this three-year period, the NBFC, with the prior approval of RBI, may not appoint another IO.

6. Appointment of the IO:

a) The person to be appointed as IO shall fulfil the following prerequisites:

i. The person shall be either a retired or a serving officer, not below the rank of Deputy General
Manager or equivalent in any financial sector regulatory body/any other NBFC/bank, with necessary
skills and experience of minimum of seven years of working in areas such as non-banking finance,
banking, financial sector regulation or supervision, or consumer protection.

ii. The person shall not have worked/be working in the NBFC/companies in the Group 1 to which
the NBFC belongs in which he/she is being appointed as IO.

iii. The person appointed as IO shall not be above the age of 70 years at any point of time during
the tenure as IO.

(b) The NBFC may appoint more than one IO depending on the number of complaints
received/branch network. In such a case, the NBFC shall define the jurisdiction of each IO.

(c) The Principal Nodal Officer/Nodal Officer, liaising with the offices of RBI Ombudsman, or any other
official of the NBFC, shall not act as the IO or vice versa.

7. Tenure of the IO: The tenure of the IO shall be for a fixed term of not less than three years, but not
exceeding five years and the same shall be indicated in the appointment letter. The IO shall not be
eligible for reappointment or for extension of tenure in the same NBFC.

a) The NBFC shall undertake the process of fresh appointment well in advance to fill the vacancy
before the expiry of the tenure of the incumbent IO and ensure that the post of the IO does not remain
vacant at any point of time.

b) The IO shall not be removed before the completion of the contracted term without the explicit
approval of the Reserve Bank. In case the vacancy arises on account of reasons beyond the control
of the NBFC (such as death, resignation, incapacitation, terminal illness, etc.), the NBFC shall appoint
a new IO by following the procedure of appointment as indicated at para 6 of this direction, within
three months from the date of the vacancy arising.

8. Secretariat and cost of the office of the IO: The NBFC shall depute such number of its officers
and/or other staff and make available such infrastructure to the office of the IO as may be considered
necessary for its effective functioning.

a) The Board of the NBFC shall fix the emoluments/facilities/benefits of the IO, which should be
appropriate keeping in view the stature and position of the IO being at the apex of the grievance
redress mechanism of the NBFC, and the need to attract experienced persons with requisite
expertise.

b) The emoluments/facilities/benefits of the IO, once determined, shall not be changed during the
currency of his/her tenure.

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 9. Role and responsibilities of the IO: The IO shall deal only with the complaints that have already
been examined by the NBFC but have been partly or wholly rejected by the NBFC. In other words, the
IO shall not handle complaints received directly from the customers or members of the public.

a) The following types of complaints shall be outside the purview of this direction and shall not be
handled by the IO:

i. Complaints related to frauds, misappropriation etc., except those resulting from deficiency in
service, if any, on the part of the NBFC;

ii. Complaints/references relating to (a) internal administration, (b) human resources, (c) pay
and emoluments of staff;

iii. References in the nature of suggestions and commercial decisions of the NBFC;

iv. Complaints which have been decided by or are already pending in other fora such as
Consumer Disputes Redressal Commission, courts, etc.

b) The complaints that are outside the purview of this direction shall be immediately referred back to
the NBFC by the IO.

c) The IO shall examine the complaints based on records available with the NBFC, including any
documents submitted by the complainant, and comments/clarifications furnished by the NBFC to the
specific queries of the IO. The IO may seek additional information from the complainant through the
NBFC.

d) The NBFC shall furnish all records/documents sought by the IO to enable expeditious
redress/resolution of customer grievances.

e) The IO may hold meetings with the concerned functionaries/departments of the NBFC and seek
any record/document available with the NBFC that is necessary for examining the complaint/decision.

f) The IO shall periodically analyse the pattern of all complaints received against the NBFC, such as
product-wise, category-wise, consumer group-wise, geographical location-wise, etc. and provide
inputs to the NBFC for policy intervention, if any.

g) The IO shall not represent the NBFC in legal cases before any court or fora or authority.

h) The IO shall report to the Managing Director/Chief Executive Officer of the NBFC administratively,
and to the Board functionally.

10. Procedural guidelines for NBFCs regarding complaints referred to the IO by the NBFC: The NBFC
shall formulate a Standard Operating Procedure approved by its Board and establish a system of
auto-escalation of all complaints that are partly or wholly rejected by the NBFC’s internal grievance
redress mechanism to the IO for a final decision.

a) The NBFC shall internally escalate all such complaints to the IO within a period of three weeks from
the date of receipt of the complaint. The IO and the NBFC shall ensure that the final decision is
communicated to the complainant within 30 days from the date of receipt of the complaint by the
NBFC.

b) In case the NBFC has a complaint management software, it shall provide to the IO  read-
only access to the system and enable uploading of the decision of the IO.

c) The IO shall also have read-only access to the Reserve Bank’s Complaint Management System to
enable the IO to keep track of: (a) the cases forwarded by the offices of RBI Ombudsmen, (b)

25
decisions of the RBI Ombudsmen, and (c) where applicable, the decision of the Appellate Authority
under the RBI Ombudsman scheme.

d) The decision of the IO shall be binding on the NBFC, except in cases where the NBFC has
obtained approval for disagreeing with the IO’s decision as stated in sub-para 10 (f).

e) In case the IO upholds the decision of the NBFC to reject/partly reject the complaint, the reply to
the customer should explicitly state the fact that the complaint has been examined by the IO and, for
the reasons stated in the reply, the decision of the NBFC has been upheld.

f) In case the IO overrules the decision of the NBFC to reject/partly reject the complaint, the NBFC
can disagree with the decision of the IO with the approval of the Executive Director/Managing
Director/Chief Executive Officer as may be applicable. In such cases, the reply to the complainant
shall explicitly state the fact that the complaint was examined by the IO and the decision of the NBFC
was overruled by the IO in favour of the complainant; however, the NBFC, with the approval of the
Managing Director/Chief Executive Officer, has disagreed with the decision of the IO. All such cases
shall be subsequently reviewed on a quarterly basis by the Board of the NBFC.

g) In case of complaints that are fully or partly rejected even after examination by the IO, the NBFC
shall necessarily advise to the complainant as part of the reply that he/she can approach the RBI
Ombudsman for redress (if the complaint falls under the RBI Ombudsman mechanism) along with
complete details. The advice should include the link to Reserve Bank’s portal ( cms.rbi.org.in) for
online filing of customer complaints.

h) The NBFC shall use the analysis of complaints handled by the IO in their training
programmes/conferences to raise awareness among the frontline staff about, inter-alia, the pattern of
complaints being received in the NBFC, their root causes, remedial measures and expected action on
the part of frontline staff. The IO may also be associated with such trainings, where necessary.

i) While assessing the performance of the IO, in addition to the level of pendency etc., the NBFC shall
also consider the number of cases where substantive differences were observed between the
decisions of the IO vis-à-vis those given by the RBI Ombudsman subsequently.

j) The NBFC shall disseminate the guidelines/instructions regarding the role of the IO among its staff
while communicating the appointment of the IO in the organization (all branches and administrative
offices).

k) The NBFC shall not provide the contact details of the IO in the public domain as the IO shall not
handle complaints received directly from the customers.

l) The decision of the IO shall mandatorily be included in the information submitted by the NBFC to the
office of the RBI Ombudsman while replying to/furnishing documents to the office of the RBI
Ombudsman.

m) If the opinion of the IO is not available with the NBFC when the complainant approaches the RBI
Ombudsman, the NBFC should obtain the views of the IO and include the same in its submission to
the office of the RBI Ombudsman.

n) The IO shall function from the Head/Corporate Office of the NBFC.

11. Reporting to RBI: The NBFC shall put in place a system of periodic reporting of information to
Reserve Bank as indicated 

45. Companies registered with MCA but not registered with RBI as NBFCs also sometimes
default in repayment of deposit/ amounts invested with them? What is the recourse available
to the investors in such an event? Does RBI have any role to play in such cases?

26
 Companies registered with MCA but not required to be registered with RBI as NBFC are not under the
regulatory domain of RBI. Whenever RBI receives any such complaints about the companies
registered with MCA but not registered with RBI as NBFCs, it forwards the complaints to the Registrar
of Companies (ROC) of the respective state for any action. The complainants are advised that the
complaints relating to irregularities of such companies should be promptly lodged with ROC
concerned for initiating corrective action. However, in case it comes to the knowledge of RBI those
companies were required to be registered with the RBI, but have not done so and have accepted
deposits as defined under RBI Act, such action as is deemed necessary under the provisions of the
RBI Act will be taken.

46. The NBFCs have been made liable to pay interest on the overdue matured deposits if the
company has not been able to repay the matured public deposits on receipt of a claim from the
depositor. Please elaborate the provisions.

As per Reserve Bank’s Directions, overdue interest is payable to the depositors in case the company
has delayed the repayment of matured deposits, and such interest is payable from the date of receipt
of such claim by the company or the date of maturity of the deposit whichever is later, till the date of
actual payment. If the depositor has lodged his claim after the date of maturity, the company would be
liable to pay interest for the period from the date of claim till the date of repayment. For the period
between the date of maturity and the date of claim it is the discretion of the company to pay interest.
In cases where NBFCs are required to freeze the term deposits of customer based on the orders of
the enforcement authorities or the deposit receipts are seized by the enforcement authorities, they
shall follow the procedure as given below:

i. request letter may be obtained from the customer on maturity. While obtaining the request
letter from the depositor for renewal, NBFCs should also advise him to indicate the term for which
the deposit is to be renewed. In case the depositor does not exercise his option of choosing the
term for renewal, NBFCs may renew the same for a term equal to the original term.
ii. No new receipt is required to be issued. However, suitable note may be made regarding
renewal in the deposit ledger.
iii. Renewal of deposit may be advised by registered letter / speed post / courier service to the
concerned Government department under advice to the depositor. In the advice to the depositor,
the rate of interest at which the deposit is renewed should also be mentioned.
iv. If overdue period does not exceed 14 days on the date of receipt of the request letter, renewal
may be done from the date of maturity. If it exceeds 14 days, NBFCs may pay interest for the
overdue period as per the policy adopted by them, and keep it in a separate interest free sub-
account which should be released when the original fixed deposit is released.

However the final repayment of the principal and the interest so accrued should be done only after the
clearance regarding the same is obtained by the NBFCs from the respective Government agencies.

47. Can a company pre-pay its public deposits?

An NBFC accepts deposits under a mutual contract with its depositors. In case a depositor requests
for pre-mature payment, Reserve Bank of India has prescribed Regulations for such an eventuality in
the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions,
1998 wherein it is specified that NBFCs cannot grant any loan against a public deposit or make
premature repayment of a public deposit within a period of three months (lock-in period) from the date
of its acceptance. However, in the event of death of a depositor, the company may, even within the
lock-in period, repay the deposit at the request of the joint holders with survivor clause / nominee /
legal heir only against submission of relevant proof, to the satisfaction of the company

An NBFC, (which is not a problem company) subject to above provisions, may permit after the lock–in
period, premature repayment of a public deposit at its sole discretion, at the rate of interest prescribed
by the Bank

A problem NBFC is prohibited from making premature repayment of any deposits or granting any loan
against public deposit/deposits, as the case may be. The prohibition shall not, however, apply in the

27
case of death of depositor or repayment of tiny deposits i.e. up to ₹ 10000/- subject to lock in period
of 3 months in the latter case.

48. What is the liquid assets requirement for the deposit taking companies? Where are these
assets kept? Do depositors have any claims on them?

In terms of Section 45-IB of the RBI Act, 1934, the minimum level of liquid assets to be maintained by
NBFCs is 15 per cent of public deposits outstanding as on the last working day of the second
preceding quarter. Of the 15%, NBFCs are required to invest not less than ten percent in approved
securities and the remaining 5% can be in unencumbered term deposits with any scheduled
commercial bank. Thus, the liquid assets may consist of Government securities, Government
guaranteed bonds and term deposits with any scheduled commercial bank.

The investment in Government securities should be in dematerialised form which can be maintained
in Constituents’ Subsidiary General Ledger (CSGL) Account with a scheduled commercial bank (SCB)
/ Stock Holding Corporation of India Limited (SHICL). In case of Government guaranteed bonds the
same may be kept in dematerialised form with SCB/SHCIL or in a dematerialised account with
depositories [National Securities Depository Ltd. (NSDL)/Central Depository Services (India) Ltd.
(CDSL)] through a depository participant registered with Securities & Exchange Board of India (SEBI).
However in case there are Government bonds which are in physical form the same may be kept in
safe custody of SCB/SHCIL.

NBFCs have been directed to maintain the mandated liquid asset securities in a dematerialised form
with the entities stated above at a place where the registered office of the company is situated.
However, if an NBFC intends to entrust the securities at a place other than the place at which its
registered office is located, it may do so after obtaining the permission of RBI in writing. It may be
noted that liquid assets in approved securities will have to be maintained in dematerialised form only.
The liquid assets maintained as above are to be utilised for payment of claims of depositors.
However, deposits being unsecured in nature, depositors do not have direct claim on liquid assets.

49. What does RBI do to protect the interest of NBFC depositors?

RBI has issued detailed regulations on deposit acceptance, including the quantum of deposits that
can be collected, mandatory credit rating, mandatory maintenance of liquid assets for repayment to
depositors, manner of maintenance of its deposit books, prudential regulations including maintenance
of adequate capital, limitations on exposures, and inspection of the NBFCs, besides others, to ensure
that the NBFCs function on sound lines. If the Bank observes through its inspection or audit of any
NBFC or through complaints or through market intelligence, that a certain NBFC is not complying with
RBI directions, it may prohibit the NBFC from accepting further deposits and prohibit it from selling its
assets. In addition, if the depositor has complained to the Company Law Board (CLB) which has
ordered repayment and the NBFC has not complied with the CLB order, RBI can initiate prosecution
of the NBFC, including criminal action and winding up of the company.

More importantly, RBI initiates prompt action, including imposing penalties and taking legal action
against companies which are found to be violating RBI's instructions/norms on basis of Market
Intelligence reports, complaints, exception reports from statutory auditors of the companies,
information received through SLCC meetings, etc. The Reserve Bank immediately shares such
information with all the financial sector regulators and enforcement agencies in the State Level
Coordination Committee Meetings.

As a premier public policy institution, as part of its public policy measure, the Reserve Bank of India
has been in the forefront in taking several initiatives to create awareness among the general public on
the need to be careful while investing their hard earned money. The initiatives include issue of
cautionary notices in print media and distribution of informative and educative brochures/pamphlets
and close interaction with the public during awareness/outreach programs, Townhall events,
participation in State Government sponsored trade fairs and exhibitions. At times, it even requests
newspapers with large circulation (English and vernacular) to desist from accepting advertisements
from unincorporated entities seeking deposits.

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50. Who rates deposit taking NBFCs for acceptance of deposit?

NBFCs may get itself rated by any of the six rating agencies namely, CRISIL, CARE, ICRA, FITCH
Ratings India Pvt. Ltd, Brickwork Ratings India Pvt. Ltd. and SMERA.

51. What are the symbols of minimum investment grade rating of different companies? When a
company’s rating is downgraded, does it have to bring down its level of public deposits
immediately or over a period of time?

The symbols of minimum investment grade rating of the Credit rating agencies are:

Name of rating agencies Nomenclature of minimum

investment
grade credit rating (MIGR)
CRISIL FA- (FA MINUS)
ICRA MA- (MA MINUS)
CARE CARE BBB (FD)
FITCH Ratings India Pvt. Ltd. tA-(ind)(FD)
SMERA SMERA A
Brickwork Ratings India Pvt. BWR FBBB
Ltd.

It may be added that A- is not equivalent to A, AA- is not equivalent to AA and AAA- is not equivalent
to AAA.

However, if rating of an NBFC is downgraded to below minimum investment grade rating, it has to
stop accepting public deposits, report the position within fifteen working days to the RBI and bring
within three years from the date of such downgrading of credit rating, the amount of public deposit to
nil. With the introduction of revised regulatory framework in November 2014 deposit taking NBFCs
have to mandatorily get investment grade credit rating for being eligible to accept public deposits.

52. What is the purpose of enacting Protection of Interest of Depositors in Financial

Establishments Act by the State Governments?

The purpose of enacting this law is to protect the interests of the depositors. The provisions of RBI Act
are directed towards enabling RBI to issue prudential regulations that make the financial entities
function on sound lines. RBI is a civil body and the RBI act is a civil Act. Both do not have specific
provisions to effect recovery by attachment and sale of assets of the defaulting companies, entities or
their officials. It is the State government machinery which can effectively do this. The Protection of
Interest of Depositors in Financial Establishments Acts, confers adequate powers on the State
Governments to attach and sell assets of the defaulting companies, entities and their officials.

53. Will the passage of the Protection of Interest of Depositors in Financial Establishments by
the State Governments help in nailing unincorporated entities and companies from
unauthorisedly accepting deposits?

Yes, to a large extent. The Act makes offences, such as, unauthorized acceptance of deposits by any
entity, firm or company a cognizable offence, that is entities that are indulging in unauthorized deposit
acceptance or unlawful financial activities can be immediately imprisoned and prosecuted. Under the
Act, the State Governments have been given vast powers to attach the property of such entities,
dispose them off under the orders of special courts and distribute the proceeds to the depositors. The
widespread State Government / State Police machinery is best positioned to take quick action against
the culprits. The Reserve Bank has, therefore, been urging all the State Governments to pass the
legislation on Protection of Interest of Depositors in Financial Establishment Act.

29
54. Still there are cases of unscrupulous financial entities cheating public time and again. How
does RBI plan to strengthen its surveillance on unauthorized acceptance of
deposits/unauthorized conduct of NBFI business by companies?

The Reserve Bank is strengthening its market intelligence function in various Regional Offices and is
constantly examining the financials of companies, references for which have been received through
market intelligence or complaints to the Reserve Bank. In this, context, members of public can
contribute a great deal by being vigilant and lodging a complaint immediately if they come across any
financial entity that contravenes the RBI Act. For example, if they are accepting deposits
unauthorisedly and/conducting NBFC activities without obtaining due permission from the RBI. More
importantly, these entities will not be able to function if members of public start investing wisely.
Members of the public must know that high returns on investments will also have high risks. And there
can be no assured return for speculative activities. Before investing the public must ensure that the
entity they are investing in is a regulated entity with one of the financial sector regulators.

F. Collective Investment Schemes (CIS) and Chit Funds

55. Are Collective Investment Schemes (CIS) regulated by the Reserve Bank of India?

No. CIS are schemes where money is exchanged for units, be it time share in resorts, profit from sale
of wood or profits from the developed commercial plots and buildings and so on. Collective
Investment Schemes (CIS) do not fall under the regulatory purview of the Reserve Bank.

56. Which is the authority that regulates Collective Investment Schemes (CIS)?

SEBI is the regulator of CIS. Information on such schemes and grievances against the promoters may
be immediately forwarded to SEBI as well as to the EOW/Police Department of the State
Government.

57. Is the conducting of Chit Fund business permissible under law?

The chit funds are governed by Chit Funds Act, 1982 which is a Central Act administered by state
governments. Those chit funds which are registered under this Act can legally carry on chit fund
business.

58. If Chit Fund companies are financial entities, why are they not regulated by RBI?

Chit Fund companies are regulated under the Chit Fund Act, 1982, which is a Central Act, and is
implemented by the State Governments. RBI has prohibited chit fund companies from accepting
deposits from the public in 2009. In case any Chit Fund is accepting public deposits, RBI can
prosecute such chit funds.

G. Money Circulation/Multi-Level Marketing (MLM)/ Ponzi Schemes/ Unincorporated Bodies

(UIBs)

59. There are some companies like Multi-Level Marketing companies, Direct Selling
Companies, Online Selling Companies. Do they come under the purview of RBI?

No, Multi-Level Marketing companies, Direct Selling Companies, Online Selling Companies do not fall
under the purview of RBI. Activities of these companies fall under the regulatory/administrative
domain of respective state government. The list of regulators and the entities regulated by them are
as provided in Annex I.

60. What are money circulation/Ponzi/multi-level marketing schemes?

Money circulation, multi level marketing / Chain Marketing or Ponzi schemes are schemes promising
easy or quick money upon enrollment of members. Income under Multi level marketing or pyramid

30
structured schemes do not come from the sale of products they offer as much as from enrolling more
and more members from whom hefty subscription fees are taken. It is incumbent upon all members to
enroll more members, as a portion of the subscription amounts so collected are distributed among the
members at the top of the pyramid. Any break in the chain leads to the collapse of the pyramid, and
the members lower in the pyramid are the ones that are affected the most. Ponzi schemes are those
schemes that collect money from the public on promises of high returns. As there is no asset creation,
money collected from one depositor is paid as returns to the other. Since there is no other activity
generating returns, the scheme becomes unviable and impossible for the people running the scheme
to meet the promised return or even return the principal amounts collected. The scheme inevitably
fails and the perpetrators disappear with the money.

61. Is acceptance of money under Money Circulation/Multi-level Marketing/Pyramid structured

schemes allowed? Does RBI regulates such schemes?

No. Acceptance of money under Money Circulation/Multi-level Marketing/Pyramid structured schemes

and Ponzi schemes is not allowed as acceptance of money under those schemes is a cognizable
offence under the Prize Chit and Money Circulation (Banning) Act 1978 and are hence banned. The
Reserve Bank has no role in implementation of this Act, except advising and assisting the Central
Government in framing the Rules under this Act.

62. Then who regulates entities that run such schemes?

Money Circulation/Multi-level Marketing /Pyramid structured schemes are an offence under the Prize
Chits and Money Circulation Schemes (Banning) Act, 1978. The Act prohibits any person or individual
to promote or conduct any prize chit or money circulation scheme or enrol as member to its schemes
or anyone to participate in it by either receiving or remitting any money in pursuance of such chit or
scheme. Contravention of the provisions of this Act, is monitored and dealt with by the State
Governments.

63. What if someone operates such a scheme?

Any information/grievance relating to such schemes should be given to the police / Economic Offence
Wing (EOW) of the concerned State Government or the Ministry of Corporate Affairs. If brought to RBI
notice – we will inform the same to the concerned State Government authorities.

64. What are Unincorporated Bodies (UIBs)? Has RBI any role to play in curbing illegal deposit
acceptance activities of UIBs? Who has the power to take action against Unincorporated
Bodies (UIBs) accepting deposits?

Unincorporated bodies (UIBs) include an individual, a firm or an unincorporated association of

individuals. In terms of provision of section 45S of RBI act, these entities are prohibited from
accepting any deposit. The Act makes acceptance of deposits by such UIBs punishable with
imprisonment or fine or both. The State government has to play a proactive role in arresting the illegal
activities of such entities to protect interests of depositors/investors.

UIBs do not come under the regulatory domain of RBI. Whenever RBI receives any complaints
against UIBs, it immediately forwards the same to the state government police agencies (Economic
Offences Wing (EOW)). The complainants are advised to lodge the complaints directly with the State
government police authorities (EOW) so that appropriate action against the culprits is taken
immediately and the process is hastened.

As per Section 45T of RBI Act, both the RBI and State Governments have been given concurrent
powers. Nonetheless, in order to take immediate action against the offender, the information should
immediately be passed on to the State Police or the Economic Offences Wing of the concerned State
who can take prompt and appropriate action. Since the State Government machinery is widespread
and the State Government is also empowered to take action under the provisions of RBI Act, 1934,
any information on such entities accepting deposits may be provided immediately to the respective
State Government’s Police Department/EOW.

31
Many of the State Governments have enacted the State Protection of Interests of Depositors in
Financial Establishments Act, which empowers the State Government to take appropriate and timely
action.

RBI on its part has taken various steps to curb activities of UIBs which includes spreading awareness
through advertisements in leading newspapers to sensitise public, organize various investors
awareness programmes in various districts of the country, keeps close liaison with the law enforcing
agencies (Economic Offences Wing).

65. There are some entities (not companies) which carry on activities like that of NBFCs. Are
they allowed to take deposits? Who regulates them?

Any person who is an individual or a firm or unincorporated association of individuals cannot accept
deposits except by way of loan from relatives, if his/its business wholly or partly includes loan,
investment, hire-purchase or leasing activity or principal business is that of receiving of deposits under
any scheme or arrangement or in any manner or lending in any manner.

66. What precautions have to be taken by the public to forewarn themselves about the
likelihood of losing money in schemes that offer high rates of interest?

Before investing in schemes that promise high rates of return investors must ensure that the entity
offering such returns is registered with one of the financial sector regulators and is authorized to
accept funds, whether in the form of deposits or otherwise. Investors must generally be circumspect if
the interest rates or rates of return on investments offered are high. Unless the entity accepting funds
is able to earn more than what it promises, the entity will not be able to repay the investor as
promised. For earning higher returns, the entity will have to take higher risks on the investments it
makes. Higher the risk, the more speculative are its investments on which there can be no assured
return. As such, the public should forewarn themselves that the likelihood of losing money in schemes
that offer high rates of interest are more.

67. Who can the Depositor/Investor turn to in case of grievances?

The two Charts given at Annex I and II depict the activities and the regulators overseeing the same.
Complaints may hence be addressed to the concerned regulator. If the activity is a banned activity,
the aggrieved person can approach the State Police/Economic Offences Wing of the State Police and
lodge a suitable complaint.

68. What constitutes Commercial Real Estate exposure?

An exposure to be classified as CRE, the essential feature would be that the funding will result in the
creation/ acquisition of real estate (such as, office buildings to let, retail space, multifamily residential
buildings, industrial or warehouse space, and hotels) where the prospects for repayment would
depends primarily on the cash flows generated by the asset. Additionally, the prospect of recovery in
the event of default would also depend primarily on the cash flows generated from such funded asset
which is taken as security, as would generally be the case. The primary source of cash flow (i.e. more
than 50% of cash flows) for repayment would generally be lease or rental payments or the sale of the
assets as also for recovery in the event of default where such asset is taken as security.

These guidelines will also be applicable to certain cases where the exposure may not be directly
linked to the creation or acquisition of CRE but the repayment would come from the cash flows
generated by CRE. For example, exposures taken against existing commercial real estate whose
prospects of repayments primarily depend on rental/ sale proceeds of the real estate should be
classified as CRE. Other such cases may include: extension of guarantees on behalf of companies
engaged in commercial real estate activities, exposures on account of derivative transactions
undertaken with real estate companies, corporate loans extended to real estate companies and
investment made in the equity and debt instruments of real estate companies.

32
69. In terms of para 7.1 of the revised regulatory framework issued vide CC No. 002 dated
November 10, 2014, total assets of NBFCs in a group including deposit taking NBFCs, if any,
will be aggregated to determine if such consolidation falls within the asset sizes of the two
categories viz., NBFCs-ND (those with assets of less than ₹ 500 crore) and NBFCs-ND-SI
(those with assets of ₹ 500 crore and above). Regulations as applicable to the two categories
will be applicable to each of the NBFC-ND within the group. Will this aggregation of assets
apply to exempted category of CICs in the group?

No, the group requires to aggregate total assets of only those NBFCs which have been granted
Certificate of Registration by the Bank. However, it must be ensured that the capital of the exempted
category of CIC has not come, directly or indirectly, from an entity/ group company which has
accessed public funds.

70 Whether LTV of 50% will also apply to lending against units of mutual funds?

Loans against units of mutual funds (except units of exclusively debt oriented mutual funds) would
attract LTV requirements as are applicable to loans against shares. Further, the LTV requirement for
loans/ advances against units of exclusively debt-oriented mutual funds may be decided by individual
NBFCs in accordance with their loan policy.

71. Is prior written approval required in cases of merger of an NBFC ‘A’, with another NBFC/
entity ‘B’?

In this case prior written approval of the Reserve Bank is to be obtained by ‘A’. Where ‘B’ is an NBFC,
as a result of merger if there is change in shareholding pattern of paid up equity capital of ‘B’ by 26%
or more, prior written approval of the Reserve Bank is required. If ‘B’ is not an NBFC but is likely to
meet PBC post-merger, it would also need to approach the Reserve Bank for prior written approval as
well as registration as an NBFC.

72. Is prior written approval required in cases of merger of an entity (not an NBFC) with an
NBFC?

Where a non-NBFC mergers with an NBFC, prior written approval of the Reserve Bank would be
required if such a merger satisfies any one or both the conditions viz., (i) any change in the
shareholding of the NBFC consequent on the merger which would result change in shareholding
pattern of 26 per cent or more of the paid up equity capital of the NBFC (ii) any change in the
management of the NBFC which would result in change in more than 30 per cent of the directors,
excluding independent directors.

73. Is prior written approval required in cases of amalgamation of an NBFC ‘A’, with another
NBFC/ entity ‘B’?

The NBFC/s being amalgamated will require to obtain prior written approval of the Reserve Bank.

74. Is prior written approval of the Reserve Bank required before approaching any Court or
Tribunal for seeking orders for merger/ amalgamation?

Yes, prior approval of the Reserve Bank would have to be obtained before approaching any Court or
Tribunal seeking orders for merger/ amalgamation in all such cases which would ordinarily fall under
the scenarios explained in FAQs 84, 85 or 86.

75. CHART 1

33
* NBFC is a financial Institution that is into Lending or Investment or collecting monies under any
scheme or arrangement but does not include any institutions which carry on its principal business as
agriculture activity, industrial activity, trading and purchase or sale of immovable properties. A
company that carries on the business of accepting deposits as its principal business is also a NBFC.

76. CHART II

34
C. Residuary Non-Banking Companies (RNBCs)

77. What is a Residuary Non-Banking Company (RNBC)? In what way it is different from other
NBFCs?

Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal
business the receiving of deposits, under any scheme or arrangement or in any other manner and not
being Investment, Asset Financing, Loan Company. These companies are required to maintain
investments as per directions of RBI, in addition to liquid assets. The functioning of these companies
is different from those of NBFCs in terms of method of mobilization of deposits and requirement of

35
deployment of depositors' funds as per Directions. Besides, Prudential Norms Directions are
applicable to these companies also.

78. We understand that there is no ceiling on raising of deposits by RNBCs, then how safe is
deposit with them?

It is true that there is no ceiling on raising of deposits by RNBCs. However, every RNBC has to
ensure that the amounts deposited with it are fully invested in approved investments. In other words,
in order to secure the interests of depositor, such companies are required to invest 100 per cent of
their deposit liability into highly liquid and secure instruments, namely, Central/State Government
securities, fixed deposits with scheduled commercial banks (SCB), Certificate of Deposits of SCB/FIs,
units of Mutual Funds, etc.

79. Can RNBC forfeit deposit if deposit instalments are not paid regularly or discontinued?

No. Residuary Non-Banking Company cannot forfeit any amount deposited by the depositor, or any
interest, premium, bonus or other advantage accrued thereon.

80. What is the rate of interest that an RNBC must pay on deposits and what should be
maturity period of deposits taken by them?

The minimum interest an RNBC should pay on deposits should be 5% (to be compounded annually)
on the amount deposited in lump sum or at monthly or longer intervals; and 3.5% (to be compounded
annually) on the amount deposited under daily deposit scheme. Interest here includes premium,
bonus or any other advantage, that an RNBC promises to the depositor by way of return. An RNBC
can accept deposits for a minimum period of 12 months and maximum period of 84 months from the
date of receipt of such deposit. They cannot accept deposits repayable on demand. However, at
present, the only RNBCs in existence (Peerless) has been directed by the Reserve Bank to stop
collecting deposits, repay the deposits to the depositor and wind up their RNBC business as their
business model is inherently unviable.

81. MASTER DIRECTIONS

The Reserve Bank of India has started issuing Master Directions on all regulatory matters beginning
January 2016. The Master Directions consolidate instructions on rules and regulations framed by the
Reserve Bank under various Acts including banking issues and foreign exchange transactions. The
process of issuing Master Directions involves issuing one Master Direction for each subject matter
covering all instructions on that subject. Any change in the rules, regulation or policy is communicated
during the year by way of circulars/press releases. The Master Directions will be updated suitably and
simultaneously whenever there is a change in the rules/regulations or there is a change in the policy.
All the changes will get reflected in the Master Directions available on the RBI website along with the
dates on which changes are made. Explanations of rules and regulations will be issued by way of
Frequently Asked Questions (FAQs) after issue of the Master Directions in easy to understand
language wherever necessary. The existing set of Master Circulars issued on various subjects will
stand withdrawn with the issue of the Master Direction on the subject.

Non-banking
Feb 17, 2021
Master Direction – Non-Banking Financial Company – Housing Finance Company
(Reserve Bank) Directions, 2021 (Updated as on October 05, 2021)  1154 kb
Oct 25, 2018
Master Direction - Fit and Proper Criteria for Sponsors - Asset Reconstruction
Companies (Reserve Bank) Directions, 2018  146 kb
Oct 04, 2017
Master Directions - Non-Banking Financial Company – Peer to Peer Lending Platform
(Reserve Bank) Directions, 2017 (Updated as on October 05, 2021)  611 kb

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Jun 08, 2017
Master Direction - Information Technology Framework for the NBFC Sector  254 kb
Nov 10, 2016
Master Directions - Mortgage Guarantee Companies (Reserve Bank) Directions, 2016
(Updated as on October 05, 2021)  357 kb
Sep 29, 2016
Master Direction- Non-Banking Financial Company Returns (Reserve Bank) Directions,
2016  148 kb
Master Direction - Non-Banking Financial Companies Auditor’s Report (Reserve Bank)
Directions, 2016  160 kb

Master Direction - Monitoring of Frauds in NBFCs (Reserve Bank) Directions, 2016  236 kb
Sep 02, 2016
Master Direction- Non-Banking Financial Company - Account Aggregator (Reserve
Bank) Directions, 2016 (Updated as on October 05, 2021)  569 kb
Sep 01, 2016
Master Direction - Non-Banking Financial Company – Non-Systemically Important Non-
Deposit taking Company (Reserve Bank) Directions, 2016 (Updated as on February 17,  1387 kb
2020)
Master Direction - Non-Banking Financial Company - Systemically Important Non-
Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016  2472 kb
(Updated as on February 17, 2020)
Aug 25, 2016
Master Direction - Non-Banking Financial Companies Acceptance of Public Deposits
(Reserve Bank) Directions, 2016 (Updated as on February 22, 2019)  273 kb
Master Direction - Core Investment Companies (Reserve Bank) Directions, 2016
(Updated as on October 05, 2021)  850 kb
Master Direction - Exemptions from the provisions of RBI Act, 1934 (Updated as on
November 24, 2020)  144 kb
Master Direction - Miscellaneous Non-Banking Companies (Reserve Bank) Directions,
2016  97 kb
Master Direction - Standalone Primary Dealers (Reserve Bank) Directions, 2016
(Updated as on October 05, 2021)  848 kb
Master Direction - Residuary Non-Banking Companies (Reserve Bank) Directions,
2016 (Updated as on February 22, 2019)

82. New Regime for NBFC’s

RBI/2021-22/112
DOR.CRE.REC.No.60/03.10.001/2021-22

October 22, 2021

All Non-Banking Financial Companies

Madam / Sir,

Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs

37
The contribution of NBFCs towards supporting real economic activity and their role as a supplemental
channel of credit intermediation alongside banks is well recognised. Over the years, the sector has
undergone considerable evolution in terms of size, complexity, and interconnectedness within the
financial sector. Many entities have grown and become systemically significant and hence there is a
need to align the regulatory framework for NBFCs keeping in view their changing risk profile.

2. Pursuant to the announcement made in the Statement on Developmental and Regulatory Policies

dated December 04, 2020, a discussion paper titled ‘Revised Regulatory Framework for NBFCs - A
Scale-based Approach’ was issued for public comments on January 22, 2021. Based on the inputs
received, it has now been decided to put in place a revised regulatory framework for NBFCs (Annex).

3. As the SBR framework encompasses different facets of regulation of NBFCs covering capital
requirements, governance standards, prudential regulation, etc., it has been decided to first issue an
integrated regulatory framework for NBFCs under SBR providing a holistic view of the SBR structure,
set of fresh regulations being introduced and respective timelines. Detailed guidelines as delineated in
the Annex, will be issued subsequently.

4. These guidelines shall be effective from October 01, 2022. The instructions relating to ceiling on
IPO funding given vide para 3.1(d) of the Annex shall come into effect from April 01, 2022.

Annex

Framework for Scale Based Regulation for Non-Banking Financial Companies

Section I

1. Regulatory Structure for NBFCs

1.1 Regulatory structure for NBFCs shall comprise of four layers based on their size, activity, and
perceived riskiness. NBFCs in the lowest layer shall be known as NBFC - Base Layer (NBFC-BL).
NBFCs in middle layer and upper layer shall be known as NBFC - Middle Layer (NBFC-ML) and
NBFC - Upper Layer (NBFC-UL) respectively. The Top Layer is ideally expected to be empty and will
be known as NBFC - Top Layer (NBFC-TL).

Details of NBFCs populating the various layers shall be as prescribed in paras 1.2 to 1.6 below:

Base Layer

1.2 The Base Layer shall comprise of (a) non-deposit taking NBFCs below the asset size of ₹1000
crore and (b) NBFCs undertaking the following activities- (i) NBFC-Peer to Peer Lending Platform
(NBFC-P2P), (ii) NBFC-Account Aggregator (NBFC-AA), (iii) Non-Operative Financial Holding
Company (NOFHC) and (iv) NBFCs not availing public funds and not having any customer interface 1.

Middle Layer

1.3 The Middle Layer shall consist of (a) all deposit taking NBFCs (NBFC-Ds), irrespective of asset
size, (b) non-deposit taking NBFCs with asset size of ₹1000 crore and above and (c) NBFCs
undertaking the following activities (i) Standalone Primary Dealers (SPDs), (ii) Infrastructure Debt
Fund - Non-Banking Financial Companies (IDF-NBFCs), (iii) Core Investment Companies (CICs), (iv)
Housing Finance Companies (HFCs) and (v) Infrastructure Finance Companies (NBFC-IFCs).

Upper Layer

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 1.4 The Upper Layer shall comprise of those NBFCs which are specifically identified by the Reserve
Bank as warranting enhanced regulatory requirement based on a set of parameters and scoring
methodology as provided in the Appendix to this circular. The top ten eligible NBFCs in terms of their
asset size shall always reside in the upper layer, irrespective of any other factor.

Top Layer

1.5 The Top Layer will ideally remain empty. This layer can get populated if the Reserve Bank is of
the opinion that there is a substantial increase in the potential systemic risk from specific NBFCs in
the Upper Layer. Such NBFCs shall move to the Top Layer from the Upper Layer.

Categorisation of NBFCs carrying out specific activity

1.6 As the regulatory structure envisages scale based as well as activity-based regulation, the
following prescriptions shall apply in respect of the NBFCs

a. NBFC-P2P, NBFC-AA, NOFHC and NBFCs without public funds and customer interface will
always remain in the Base Layer of the regulatory structure.

b. NBFC-D, CIC, IFC and HFC will be included in Middle Layer or the Upper Layer (and not in
the Base layer), as the case may be. SPD and IDF-NBFC will always remain in the Middle Layer.

c. The remaining NBFCs, viz., Investment and Credit Companies (NBFC-ICC), Micro Finance
Institution (NBFC-MFI), NBFC-Factors and Mortgage Guarantee Companies (NBFC-MGC) could lie in
any of the layers of the regulatory structure depending on the parameters of the scale based
regulatory framework.

d. Government owned NBFCs shall be placed in the Base Layer or Middle Layer, as the case
may be. They will not be placed in the Upper Layer till further notice.

Section II

2. Scale Based Regulatory Framework

2.1 References to NBFC-ND, NBFC-ND-SI & NBFC-D - From October 01, 2022, all references to
NBFC-ND shall mean NBFC-BL and all references to NBFC-D and NBFC-ND-SI shall mean NBFC-
ML or NBFC-UL, as the case may be2.

2.2 Progressive application of regulations - Regulatory revisions applicable to lower layers of

NBFCs will automatically be applicable to NBFCs residing in higher layers, unless stated otherwise.

2.3 Regulatory guidelines for NBFCs in Base Layer - NBFCs in the Base Layer (NBFC-BL) shall
be subject to regulations as currently applicable to NBFC-ND, except for the changes mentioned
below at paras 3.1 and 3.2. NBFC-P2P, NBFC-AA, and NOFHC shall be subject to extant regulations
governing them3.

2.4 Regulatory guidelines for NBFCs in Middle Layer - NBFCs in the Middle Layer (NBFC-ML)
shall continue to follow regulations as currently applicable for NBFC-ND-SIs, NBFC-Ds, CICs, SPDs
and HFCs, as the case may be, except for the changes mentioned below at paras 3.1 and 3.2.

2.5 Regulatory guidelines for NBFCs in Upper Layer - NBFCs lying in the Upper Layer (NBFC-UL)
shall be subject to regulations applicable to NBFC-ML in addition to the changes mentioned below
at paras 3.1 and 3.2.

3. Regulatory changes under Scale Based Regulation (SBR)

39
3.1 Regulatory changes under SBR for all the layers in the regulatory structure

a) Net Owned Fund – Regulatory minimum Net Owned Fund (NOF) for NBFC-ICC, NBFC-MFI and
NBFC-Factors shall be increased to ₹10 crore. 4 The following glide path is provided for the existing
NBFCs to achieve the NOF of ₹10 crore:

By March 31,
NBFCs Current NOF By March 31, 2025
2027
NBFC-ICC ₹2 crore ₹5 crore ₹10 crore
₹5 crore (₹2 crore in ₹7 crore (₹5 crore in
NBFC-MFI ₹10 crore
NE Region) NE Region)
NBFC-Factors ₹5 crore ₹7 crore ₹10 crore

However, for NBFC-P2P, NBFC-AA, and NBFCs with no public funds and no customer interface, the
NOF shall continue to be ₹2 crore. It is clarified that there is no change in the existing regulatory
minimum NOF for NBFCs - IDF, IFC, MGCs, HFC, and SPD.5

b) NPA Classification - The extant NPA classification norm stands changed to the overdue period
of more than 90 days for all categories of NBFCs. A glide path is provided to NBFCs in Base Layer
to adhere to the 90 days NPA norm as under –

NPA Norms Timeline

>150 days overdue By March 31, 2024
>120 days overdue By March 31, 2025
> 90 days By March 31, 2026

Explanation: The glide path will not be applicable to NBFCs which are already required to follow the
90-day NPA norm.

c) Experience of the Board - Considering the need for professional experience in managing the
affairs of NBFCs, at least one of the directors shall have relevant experience of having worked in a
bank/ NBFC.

d) Ceiling on IPO Funding – There shall be a ceiling of ₹1 crore per borrower for financing
subscription to Initial Public Offer (IPO). NBFCs can fix more conservative limits.

3.2 Regulatory changes under SBR for different layers in the regulatory structure –

3.2.1 Capital Guidelines –

Regulatory changes under SBR applicable to NBFC-ML and NBFC-UL

a) Internal Capital Adequacy Assessment Process (ICAAP) - NBFCs are required to make a
thorough internal assessment of the need for capital, commensurate with the risks in their business.
This internal assessment shall be on similar lines as ICAAP prescribed for commercial banks under
Pillar 2 (Master Circular – Basel III Capital Regulations dated July 01, 2015). While Pillar 2 capital will
not be insisted upon, NBFCs are required to make a realistic assessment of risks. Internal capital
assessment shall factor in credit risk, market risk, operational risk and all other residual risks as per
methodology to be determined internally. The methodology for internal assessment of capital shall be
proportionate to the scale and complexity of operations as per their Board approved policy. The
objective of ICAAP is to ensure availability of adequate capital to support all risks in business as also
to encourage NBFCs to develop and use better internal risk management techniques for monitoring
and managing their risks. This will facilitate an active dialogue between the supervisors and NBFCs
on the assessment of risks and monitoring as well as mitigation of the same.

Additional regulatory changes under SBR applicable to NBFC-UL

40
 b) Common Equity Tier 1 – In order to enhance the quality of regulatory capital, NBFC-UL shall
maintain Common Equity Tier 1 capital of at least 9 per cent of Risk Weighted Assets.

c) Leverage - In addition to the CRAR, NBFC-UL will also be subjected to leverage requirement to
ensure that their growth is supported by adequate capital, among other factors. A suitable ceiling for
leverage will be prescribed subsequently for these entities as and when necessary.

d) Differential standard asset provisioning- NBFC-UL shall be required to hold differential

provisioning towards different classes of standard assets.

A detailed circular will be issued by the Bank for guidelines at paras b, c, and d above.

3.2.2 Prudential Guidelines –

Regulatory changes under SBR applicable to NBFC-ML and NBFC-UL

a) Concentration of credit/ investment - The extant credit concentration limits prescribed for NBFCs
separately for lending and investments shall be merged into a single exposure limit of 25% for single
borrower/ party and 40% for single group of borrowers/ parties. Further, the concentration limits shall
be determined with reference to the NBFC’s Tier 1 capital instead of their Owned Fund. The revised
norms are indicated in the table below:

Revised limit
Existing limit
(as a percentage of Tier I
(as a percentage of Owned Fund)
Capital)
  Lending Investment Total   Exposure
Single borrower/
Single borrower/ party 15 15 25 25
party
Single group of Single group of
25 25 40 40
borrowers/ parties borrowers/ parties

NBFC-UL shall follow these norms till Large Exposure Framework is put in place for them. Extant
instructions on concentration norms for different categories of NBFC, other than the changes
indicated above, will continue to remain applicable.

b) Sensitive Sector Exposure (SSE) - Exposure to capital market (direct and indirect) and
commercial real estate6 shall be reckoned as sensitive exposure for NBFCs. NBFCs shall fix Board-
approved internal limits for SSE separately for capital market and commercial real estate exposures.
Dynamic vulnerability assessments of various sectors and their likely impact on business, as
evaluated periodically, should help NBFCs determine such internal exposure limits. While the Board is
free to determine various sub-limits within the overall SSE internal limits, the following are specifically
prescribed:

i. A sub-limit within the commercial real estate exposure ceiling shall be fixed internally for
financing land acquisition.

ii. Ceiling on IPO Funding as mentioned at Para 3.1.

Housing Finance Companies shall continue to follow specific regulation on sensitive sector exposure,
as are currently applicable in terms of paragraph 22 7 & 238 of Master Direction – Non-Banking
Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021.

c) Regulatory restrictions on loans – NBFCs shall be subject to regulatory restrictions in respect of

the following:

i. Granting loans and advances to directors, their relatives and to entities where directors or
their relatives have major shareholding.

41
ii. Granting loans and advances to Senior Officers of the NBFC.

iii. While appraising loan proposals involving real estate, NBFCs shall ensure that the borrowers
have obtained prior permission from government / local governments / other statutory authorities for
the project, wherever required. To ensure that the loan approval process is not hampered on account
of this, while the proposals could be sanctioned in normal course, the disbursements shall be made
only after the borrower has obtained requisite clearances from the government authorities.

A detailed circular on the areas mentioned at para c above will be issued by the Reserve Bank in due
course. In the meantime, extant norms shall prevail.

Additional regulatory changes under SBR applicable to NBFC-UL

d) Large Exposure Framework – It has been decided to introduce Large Exposure Framework (LEF)
for NBFCs placed in the Upper Layer. Accordingly, large exposure of an NBFC to all counterparties
and groups of connected counterparties will be considered for exposure ceilings. Simplified and
separate guidelines will be issued incorporating the definition of large exposure, regulatory reporting
and large exposure limits.

e) Internal Exposure Limits - In addition to the internal limits on SSE in respect of capital market and
commercial real estate as indicated in para b) above, Board of NBFC-UL shall also determine internal
exposure limits on other important sectors to which credit is extended. Further, NBFC-UL shall put in
place an internal Board approved limit for exposure to the NBFC sector.

3.2.3 Governance Guidelines

Regulatory changes under SBR applicable to NBFC-BL

a) Risk Management Committee – In order that the Board is able to focus on risk management,
NBFCs shall constitute a Risk Management Committee (RMC) either at the Board or executive level.
The RMC shall be responsible for evaluating the overall risks faced by the NBFC including liquidity
risk and will report to the Board.

b) Disclosures - Disclosure requirements shall be expanded, inter alia, to include types of exposure,
related party transactions, loans to Directors/ Senior Officers and customer complaints.

c) Loans to directors, senior officers and relatives of directors - NBFC-BL shall have a Board
approved policy on grant of loans to directors, senior officers and relatives of directors and to entities
where directors or their relatives have major shareholding.

A detailed circular on paras 3.2.3 (b) & (c) will be issued by the Reserve Bank in due course.

Regulatory changes under SBR applicable to NBFC-ML and NBFC-UL

d) Key Managerial Personnel - Except for directorship in a subsidiary, Key Managerial

Personnel9 shall not hold any office (including directorships) in any other NBFC-ML or NBFC-UL. A
timeline of two years is provided with effect from October 01, 2022 to ensure compliance with these
norms. It is clarified that they can assume directorship in NBFC-BLs.

e) Independent Director – Within the permissible limits in terms of Companies Act, 2013, an
independent director shall not be on the Board of more than three NBFCs (NBFC-ML or NBFC-UL) at
the same time. Further, the Board of the NBFC shall ensure that there is no conflict arising out of their
independent directors being on the Board of another NBFC at the same time. A timeline of two years
is provided with effect from October 01, 2022 to ensure compliance with these norms. There shall be
no restriction to directorship on the Boards of NBFC-BLs, subject to applicable provisions of
Companies Act, 2013.

42
 f) Disclosures - NBFCs shall, in addition to the existing regulatory disclosures, disclose the following
in their Annual Financial Statements, with effect from March 31, 2023:

i. Corporate Governance report containing composition and category of directors, shareholding

of non-executive directors, etc.

ii. Disclosure on modified opinion, if any, expressed by auditors, its impact on various financial
items and views of management on audit qualifications.

iii. Items of income and expenditure of exceptional nature.

iv. Breaches in terms of covenants in respect of loans availed by the NBFC or debt securities
issued by the NBFC including incidence/s of default.

v. Divergence in asset classification and provisioning above a certain threshold to be decided by

the Reserve Bank.

g) Chief Compliance Officer – In order to ensure an effective compliance culture, it is necessary to
have an independent compliance function and a strong compliance risk management framework in
NBFCs. NBFCs are, therefore, required to appoint a Chief Compliance Officer (CCO), who should be
sufficiently senior in the organization hierarchy. NBFCs shall put in place a Board approved policy
laying down the role and responsibilities of the CCO with the objective of promoting better compliance
culture in the organization.

h) Compensation guidelines - In order to address issues arising out of excessive risk taking caused
by misaligned compensation packages, it has been decided that NBFCs shall put in place a Board
approved compensation policy. The guidelines shall at the minimum include, a) constitution of a
Remuneration Committee, b) principles for fixed/ variable pay structures, and c) malus/ claw back
provisions. The Nomination and Remuneration Committee shall ensure that there is no conflict of
interest.

i) Other Governance matters - NBFCs shall comply with the following:

i. The Board shall delineate the role of various committees (Audit Committee, Nomination and
Remuneration Committee, Risk Management Committee or any other Committee) and lay down a
calendar of reviews.

ii. NBFCs shall formulate a whistle blower mechanism for directors and employees to report
genuine concerns.

iii. The Board shall ensure good corporate governance practices in the subsidiaries of the NBFC.

j) Core Banking Solution - NBFCs with 10 and more branches are mandated to adopt Core Banking
Solution. A glide path of 3 years with effect from October 01, 2022 is being provided.

Detailed circulars will be issued in due course by the Reserve Bank on guidelines indicated at paras f,
g, h, i and j above.

Additional regulatory changes under SBR applicable to NBFC-UL

k) Qualification of Board Members - Board members shall be competent to manage the affairs of
the NBFC. The composition of the Board should ensure mix of educational qualification and
experience within the Board. Specific expertise of Board members will be a prerequisite depending on
the type of business pursued by the NBFC.

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l) Listing & Disclosures - NBFC-UL shall be mandatorily listed within 3 years of identification as
NBFC-UL. Disclosure requirements shall be put in place on the same lines as applicable to a listed
company even before the actual listing, as per Board approved policy of the NBFC.

m) Removal of Independent Directors – NBFC-UL shall be required to report to the supervisors in

case any Independent Director is removed/ resigns before completion of his normal tenure.

3.3 Regulatory guidelines for NBFCs under Top Layer – NBFCs falling in the Top Layer of the
regulatory structure shall, inter alia, be subject to higher capital charge. Such higher requirements
shall be specifically communicated to the NBFC at the time of its classification in the Top Layer. There
will be enhanced and intensive supervisory engagement with these NBFCs.

83. Some Scams

PNB Nirav Modi

Sahara Scam

Sarada Scam

IMA Ponzi scheme

Co-operative banks

Other laws

84. PMLA and NBFCs

As per the law, all the NBFCs are required to register with the FIU and also file returns. The principal

officer has to inform the FIU about any cash transaction which is above Rs 10 lakh as well as about

any suspicious transactions. In total, about 11,000 NBFCs are registered with the Reserve Bank of

India. Of these, nearly 9,500 have not got themselves registered with the finance ministry’s FIU wing,

violating the norms.

As per Section 12 of the PMLA, every NBFC has to maintain proper records of all the transactions,

maintain the list of clients and the beneficiaries. They also have to ensure verification of the clients.

FIU can impose penalties on any financial institutions for non-compliance. The penalties can vary

from Rs 10,000 to Rs 1 lakh.

RED-ZONED

 The Financial Intelligence Unit of the ministry has released the list of the high risk NBFCs
which are not complying with the PMLA rules

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  But most companies on the list are small companies doing small business, while some are

new ones,” said Raman Aggarwal, chairman of Financial Industry Development Council

(FIDC).

 “Calling them high risk is unnecessary and puts them in bad light. Though it is a kind of notice

to the companies is creating panic,” he said. The FIDC has asked its members to immediately

register with the FIU and comply with the rules.

IBC and NBFCs

How India is successfully using insolvency code to resolve NBFCs in trouble

RBI superseded boards of Srei Infra Finance and Srei Equipment Finance, and their
insolvency process is expected to be IBC-like, as it was in DHFL’s case.
ILA PATNAIK  and RADHIKA PANDEY  8 October, 2021 8:31 am IST

Earlier this week, the Reserve Bank of India superseded the boards of Srei Infrastructure
Finance and Srei Equipment Finance, owing to “governance concerns” and the failure of
these companies to meet their loan repayment obligations. The RBI now plans to initiate
their insolvency proceedings through the IBC.
The RBI invoked its powers under Section 45-IE of the RBI Act. The section gives RBI the
power to supersede the board of directors of NBFCs and appoint an administrator. The RBI
Act was amended through the Finance Act of 2019 to give the RBI a bigger role in the
management of NBFCs in adverse situations. The insolvency is expected to proceed
through an IBC-like process, as was done with DHFL.
How is an NBFC different to a bank and a non-financial company, and how is the NBFC
resolution framework different to banks and non-financial firms?
Banks make high-intensity promises to unsophisticated households, to pay back their money
with interest. NBFCs are like non-financial firms in that they generally borrow from
professionals who are expected to be able to think, take risks, and suffer losses when
business plans do not pan out as expected.
The framework for bank resolution is different from that of NBFCs. In the case of banks,
there is a deposit insurance mechanism which protects unsophisticated households.
The law gives RBI the power to take control of a bank when default is imminent, and sell it to
a buyer.

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An NBFC is different not just from banks but also from non-financial firms that produce
goods and services, in terms of the Indian legal system. The bankruptcy framework of
NBFCs is different from that of non-financial firms whose bankruptcy is governed by the IBC.
The resolution process under the IBC is driven by a committee of creditors. After a company
defaults, IBC pushes aside the shareholders and their board of directors, and hands over the
control of the company to the committee of Creditors. The creditors coordinate and decide
the fate of the firm, and obey the sequence defined in the IBC through which claims of
different classes of creditors are settled.
In the NBFC framework, RBI does not have to wait for an actual default to take place. In this
respect, the process is similar to the resolution process for banks. And once RBI steps in,
there are expansive powers, and the lack of legal predictability on the resolution strategy that
will be used by RBI.

Evolution of the framework

After the global financial crisis of 2008, countries across the world realised the need for
a separate framework for resolution of banks, insurance companies and systemically
important firms. It was understood that normal insolvency proceedings are not viable for a
bank. While a default in payment could trigger a normal insolvency proceeding, in case of
banks, the regulator cannot wait till banks default on their payment obligations to depositors
or a systemically important financial institution has actually failed and had ripples across the
country.
Recognising that the failure of banks and insurance companies can be highly disruptive for
consumers and could pose systemic risk concerns for the economy as a whole, in India
the Financial Sector Legislative Reforms Commission (FSLRC, 2011-2015) recommended a
specialised resolution mechanism and establishment of a ‘Resolution Corporation’ that will
have powers of prompt resolution that make highly intense promises to consumers, such as
banks, insurance companies and systemically important financial firms. In the concepts of
the FSLRC, back in 2015, there was a distinction between this specialised resolution
framework for some financial firms, versus the normal bankruptcy code for all other firms.
This normal bankruptcy code was built by the Bankruptcy Legislative Reforms
Commission (BLRC, 2014-15) which also respected this separation: For some financial
resolution problems to be solved using the FSLRC Resolution Corporation, and all others
that go through the IBC.

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Cost of coordination
Banks and insurance companies raise funds from retail sources such as depositors or policy
holders and their liabilities are spread across a large number of depositors. The collective
action through a committee of creditors is not an optimal mechanism as the cost of
coordination is likely to be very high.
With NBFCs, the creditors are generally a small set of professionals. This is much like the
creditors of a large corporation — for example, Tata Steel. The IBC strategy, of shifting the
powers of the board of directors to the committee of creditors after default, is feasible here.

Default vs concern of default

In the case of a non-financial firm, there needs to be a default before the company can be
taken through the IBC, while in the case of a financial firm, in the present framework, the
regulator under its new powers can take control of the NBFC and decide to put it through the
IBC.
From a situation when the RBI and government tried to take over an NBFC that was going to
default (eg IL&FS) themselves, the bankruptcy process has improved. Under the amended
legal and regulatory framework, NBFCs can also go through the IBC process.

An interim framework
The IBC initially excluded Financial Service Providers from its scope. However, Section 227
of the IBC empowered the government, in consultation with the financial sector regulator, to
bring financial service providers or some categories of financial service providers under the
purview of the IBC. The rules framed in 2019 provide the procedure for insolvency of
financial service providers. In November 2019, the central government notified the
applicability of the rules to non-banking finance companies (which include housing finance
companies) with asset size of Rs 500 crore or more.
Pursuant to the amendment under the RBI Act and the IBC Rules, in 2019, the RBI launched
insolvency proceedings against DHFL. It was the first finance company to be referred to the
National Company Law Tribunal by the RBI using the special powers under IBC.
Thus, under the new NBFC resolution framework, the insolvency resolution process is
initiated on the application of the appropriate regulator. The NCLT appoints an administrator
proposed by the regulator for financial service providers admitted into insolvency
proceedings. The administrator takes on the management of the company, accept or reject
claims of creditors and handle liquidation proceedings. Upon accepting a resolution plan, the

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administrator is required to seek a no-objection from the regulator regarding the persons
who will take over the management of the financial service provider.
The amendments under the IBC and the RBI Act were made as an interim arrangement to
deal with the insolvency of certain financial service providers until a full-fledged framework is
enacted for this.

Looking ahead
Two changes may be expected going forward.
One, setting up of a Resolution Authority that will resolve banks, insurance companies and
systemically important financial firms. The Resolution Authority will have little role in
resolving non-systemically important NBFCs.
Two, as the IBC processes and NCLT courts stabilise, NBFC creditors should directly be
able to take the company to IBC. This will require amendments to the IBC and the RBI Act
so that creditors can directly approach NCLT after a default without the intervention of the
RBI.

Sarfaesi and NBFCs

MINISTRY OF FINANCE (Department of Financial Services) NOTIFICATION New Delhi,

the 24th February, 2020 S.O. 856(E).—In exercise of the powers conferred by sub-clause (iv)
of clause (m) of subsection (1) of section 2 of the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002), and in
supersession of the notifications of the Government of India, Ministry of Finance numbers
S.O. 2641(E), dated the 5th August, 2016, S.O. 4176 (E) dated the 27th August, 2018, and
S.O. 5391(E) dated 24th October, 2018, except as respects things done or omitted to be done
before such supersession, the Central Government hereby specifies such nonbanking
financial companies as defined in clause (f) of section 45-I of the Reserve Bank of India Act,
1934 (2 of 1934), having assets worth rupees one hundred crore and above, which shall be
entitled for enforcement of security interest in secured debts of rupees fifty lakh and above, as
financial institutions for the purposes of the said Act.

In her Budget speech, finance minister Nirmala Sitharaman said, “To improve
credit discipline while continuing to protect the interest of small borrowers, for
NBFCs with a minimum asset size of ₹100 crore, the minimum loan size eligible
for debt recovery under the Sarfaesi Act is proposed to be reduced from the
existing level of ₹50 lakh to ₹20 lakh".
Implications
Proceedings under the Act help lenders recover their dues faster. If a lender cannot
resort to the Sarfaesi Act, it needs to file cases in civil courts, which is a time-
consuming process. Recovery under Sarfaesi is applicable only to secured loans,
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and allows lenders to auction the property mortgaged with them to recover dues
from borrowers who have defaulted on loans. It is applicable to home loans, loan
against property, and loan against collateral that micro small medium enterprises
(MSME) avail. Under the Sarfaesi Act, a lender can take possession of the property
or mortgaged assets after a 60-day notice. Lenders can take over the physical
possession or control the mortgaged asset and can sell or transfer them to a buyer
without the intervention of any court or a third party. Once the property is
auctioned, the lender deducts its dues and pays the rest of the funds, if any, to the
property owner.
Context
Due to covid-19 pandemic, loan defaults have been rising. NBFCs wanted the
limits to be lowered so that they can take quick action against defaulters.
According to reports, in a pre-Budget meeting with the finance minister, the
Finance Industry Development Council, a representative body for NBFCs, had
suggested lowering the limit, to bring some level of parity between recovery
procedures available to banks and NBFCs, as the former can initiate recovery
under Sarfaesi Act for loans above ₹1 lakh.

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