In India, Non-Banking Financial Companies are subject to certain restrictions from taking public deposits. The RBI[1] (Reserve Bank of India) controls and oversees NBFC to preserve financial stability and safeguard depositor interests. Because of the authority granted by the Reserve Bank of India Act of 1934, the Reserve Bank of India oversees and regulates NBFC. Let us examine the restrictions on the acceptance of public deposits by NBFC in this blog.
Non-banking financial company
A non-banking financial company (NBFC) is a business registered under the Companies Act 2013 that engages in the business of advances and loans, acquisition of shares, debentures, bonds, stocks, securities issued by Government or local authority or other marketable securities of a like leasing, nature, hire-purchase, insurance, and chit business. However, it excludes institutions whose primary business is that of agriculture activity, industrial activity, or other similar activities.
Deposit under the 2013 Companies Act
A company may receive money in the form of a deposit, loan, or in any other manner; however, some categories of money may be excluded as determined in consultation with the Reserve Bank of India;
NBFC Public Deposits Regulation
All NBFC cannot accept public deposits. Public deposits may only be accepted or held by those with specific authorisation from the RBI and an investment-grade rating up to 1.5 times its net owned fund. The Non-Banking Financial Companies regulation in detail are:
- A maximum rate of interest of 12.5% may be provided to customers by Non-Banking Financial Companies. This interest might be paid or compounded on a minimum monthly basis.
- Public deposits may be renewed or accepted by Non-Banking Financial Companies for a minimum of 12 months and a maximum of 60 months.
- Deposits that are repaid on demand are not accepted.
- There is no deposit insurance.
- The RBI does not guarantee deposit repayment.
The RBI has strict regulations in place for Non-Banking Financial Companies. A minor error might result in a significant punishment or even the suspension of the licence.
Restriction on acceptance of public Deposit by Non-Banking Finance Companies
According to Chapter IV of RBI’s Master Direction (Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions), restrictions on the acceptance of public deposits by Non-banking financial companies are discussed as:
Minimum Credit Rating
Without obtaining a minimum investment grade or other specified credit rating for fixed deposits from one of the approved credit rating agencies at least once a year and without sending a copy of the rating to the Bank along with a return on prudential norms, no non-banking financial company with Net Owned Fund (NOF) of at least twenty-five lakh rupees shall accept public deposits:
Any non-banking financial organisation that has its credit rating upgraded or downgraded to a level different from the one it previously held is required to notify the Bank in writing within fifteen working days of receiving the new rating.
Minimum Investment Grade Credit Rating – The minimum investment grade credit rating shall be ‘BBB’ – from any of the credit rating agencies registered with the Securities and Exchange Board of India.
Prohibition of accepting demand deposits – Non-banking financial companies are prohibited from accepting public deposits that are repayable upon demand.
Period of Public Deposit – No non-banking financial company may accept or renew any public deposit unless it is repayable after a period of 12 months but not later than 60 months from the date of acceptance or renewal thereof.
Ceiling on the quantum of deposit
An investment and credit company or factor may accept or renew public deposits as long as the total amount of all outstanding deposits in the company’s books as of the date of acceptance or renewal does not exceed one and a half times the company’s NOF and the factor complies with all prudential standards.
- If an investment and credit firm has public deposits that are greater than one and a half times its NOF, it must wait until it achieves the revised level before renewing or accepting fresh deposits.
- Provided that no matured public deposit may be renewed without the depositor’s express and free permission.
Downgrading of Credit Rating
An NBFC, being an investment and credit company or a factor, shall regularise the excess deposit as provided herein in the event that a credit rating is downgraded below the minimum specified investment grade as provided.
(a) with immediate effect, stop accepting new public deposits and renewing existing deposits; (b) all existing deposits shall run off to maturity; and
(c) report the position within fifteen working days to the concerned regional office of the RBI where the NBFC is registered.
Maximum interest rate – No non-banking financial institution shall solicit, accept, or renew public deposits at an interest rate that exceeds 12.5% per annum. Interest may be compounded or paid at intervals no less frequent than monthly intervals.
Indian non-residents’ deposits – No non-banking financial company shall solicit, accept, or renew repatriable deposits from non-resident Indians under the Non-Resident (External) Account Scheme at a rate higher than the rate specified by the Bank for such deposits with scheduled commercial banks. The term of the aforementioned deposits shall be between one and three years, but not longer.
Payment of commission
No non-banking financial company shall pay any broker on public deposits collected by or through him.
- Brokerage, commission, incentive, or any other benefit by whatever name called, in excess of 2% of the deposit so collected; and
- Expenses by way of reimbursement on the basis of relative bills produced by him in excess of 0.5 % of the deposit so collected.
Notifying depositors of the maturity of their deposits – The non-banking financial institution is required to inform the depositor of the deposit’s maturity date and other pertinent information at least two months in advance.
Public deposit renewal
When an NBFC allows an existing depositor to renew the deposit before maturity in order to take advantage of a higher rate of interest, the company must pay the depositor the increased rate of interest, provided that –
- Renew the deposit in accordance with the other provisions of these guidelines and for a period longer than the remaining period of the actual contract; and
- If the deposit was accepted for the period for which it had run, the interest rate for the deposit’s expired period is reduced by one percentage point from the rate the company would have normally paid; any interest paid earlier that was paid in excess of the reduced rate is recovered or adjusted.
Conclusion
Despite providing a range of financial services, NBFC cannot always accept deposits from the general public. These limitations are designed to protect depositors’ interests and sustain the general stability of the financial system. While accepting deposits, it is crucial for NBFCs to properly abide by the regulatory requirements set forth by the RBI. By doing this, the interest of depositors are protected, and the financial system is kept stable.
Read our Article: Fit and Proper Criteria for NBFCs