Chapter III-B of the RBI Act, governs the provisions relating to Non-Banking Financial Institutions or NBFC.
a) Registration - S. 45-IA
A non-banking financial company cannot commence or carry on business of a non-banking financial institution until it fulfils the following conditions:
i) obtains a certificate of registration under ch. III-B of the RBI Act
ii) has net owned funds of Rs. 25 lakh or such other amount (not exceeding Rs. 2 crores) as specified by the RBI.
Every NBFC shall make an application in the form as specified by the RBI. Every NBFC already in existence on the commencement of the Reserve Bank of India (Amendment) Act, 1997 shall make an application for registration to the Bank before the expiry of six months from such commencement and may continue to carry on the business of a non-banking financial institution until a certificate of registration is issued to it or rejection of application for registration is communicated. A NBFC in existence on the commencement of the Reserve Bank of India (Amendment) Act, 1997 and having net owned funds less than Rs. 25 lakh may continue business till it fulfils the requirement of net owned funds for a period of 3 years or such further period as granted by the RBI. (Not exceeding 6 years in aggregate)
For the purpose of registration, the RBI may inspect the books of the NBFCs to satisfy the foll conditions:
i) that the NBFC is in a position to pay its present or future depositors in full as and when their claims accrue
ii) that its affairs are not likely to be conducted in a manner detrimental to the interest of its present or future depositors
iii) that the general character of the management of the NBFC shall not be prejudicial to the public interest or interest of the depositors
iv) that it has adequate capital structure and earning prospects
v) that public interest shall be served by granting registration to the said NBFC to commence and carry on business in India
vi) the grant of certificate of registration shall not be prejudicial to the operation and consolidation of the financial sector consistent with monetary stability, economic growth and considering such other relevant factors which the Bank considers important
The RBI may cancel the registration awarded to any NBFC if the company -
i) ceases to carry on the business of a non-banking financial institution in India
ii) has failed to comply with any condition subject to which the certificate of registration had been issued to it
iii) at any time fails to fulfil any of the conditions under which registration has been granted
iv) fails to -
- to comply with any direction issued by the RBI under this chapter
- to maintain accounts in accordance with the requirements of any law
- to submit or offer for inspection its books of account and other relevant documents when so demanded by the inspecting authority or RBI
- has been prohibited from accepting deposit by an order made by the Bank under the provisions of this Chapter and such order has been in force for a period of not less than three months
A company aggrieved by the order of rejection of application for registration or cancellation of certificate of registration may prefer an appeal, within a period of thirty days from the date on which such order of rejection or cancellation is communicated to it, to the Central Government.
b) Maintenance of percentage of assets - S. 45-IB
Every NBFC shall invest at least 5% and not more than 25% of the deposits outstanding at the close of business on the last working day of the second preceding quarter in unencumbered approved securities in India. The percentage of investment may be varied by the RBI. The RBI may require the NBFC to file returns in order to check compliance with this section. If the amount invested by a NBFC is less than that specified, the NBFC shall pay a penal interest at a rate of three per cent per annum above the bank rate on such difference for the first quarter and where non-compliance stretches to the subsequent quarters, the penal interest shall be 5% above the bank rate. This penal interest shall be payable withing 14 days from the date on which notice is issued by the RBI demanding such payment. On further failure to pay such dues, the RBI may make an application to the principal civil court in whose jurisdiction an office of the company is situated and request an order for levying such penalty. When the court makes a direction for payment, it will be in the form of a certificate which shall be enforceable as if it were a decree made by the Court. The RBI may not demand penal interest where it is satisfied that sufficient cause existed for non-compliance.
c) Reserve Fund - S. 45 -IC
Every NBFC shall create a reserve fund where it will transfer at least 20% of its net profits every year as per the P&L Account (before declaration of dividend). The NBFC shall not appropriate any sum from the reserve fund unless as specified by the RBI. Every appropriation shall be reported to the RBI within 21 days of such withdrawal. The Central Gov. may waive this requirement on the recommendation of the RBI provided that the amount in the reserve fund together with the amount in the share premium account is not less than the paid-up capital of the non-banking financial company.
d) Regulation/Prohibition of issue of prospectus/advertisement soliciting deposits of money - S. 45-J
When the RBI thinks it is in the general interest of the public, it may by a general/specific order -
i) regulate or prohibit the issue by any non-banking institution of any prospectus or advertisement soliciting deposits of money from the public
ii) specify the conditions subject to which any such prospectus or advertisement, if not prohibited, may be issued
e) Power of RBI to determine NBFC policies and issues - S. 45-JA
RBI can determine the policies of NBFCs in any of the following circumstances -
i) in the public interest
ii) to regulate the financial system of the country to its advantage
iii) to prevent the affairs of any non-banking financial company being conducted in a manner detrimental to the interest of the depositors
iv) in a manner prejudicial to the interest of the non-banking financial company The RBI may make policies or give directions in the following matters -
i) income recognition
ii) accounting standards
iii) making of proper provision for bad and doubtful debts
iv) capital adequacy based on risk weights for assets and credit conversion factors for off-balancesheet items
v) deployment of funds by a non-banking financial company The RBI may give directions to a NBFC/class of NBFCs as to the purpose for which advances or other fund based or non-fund based accommodation may not be made and the maximum amount of advances or other financial accommodation or investment in shares and other securities that may be made by that nonbanking financial company to any person or a company or to a group of companies.
f) Power of RBI to collect information from non-banking institutions as to deposits and to give directions - S. 45-K
The RBI may direct any NBFC to furnish such statements, information or particulars relating to or connected with deposits received by the non-banking institution by general or special order. Such statements may relate to the amount of the deposits, the purposes and periods for which, and the rates of interest and other terms and conditions on which, they are received, receipt of deposits, including the rates of interest payable on such deposits, and the periods for which deposits may be received. If any NBFC fails to abide by these directions, the RBI may prohibit it from accepting deposits in the future. Every NBFC shall also, if required by the RBI send at regular intervals a copy of its annual balance sheet and profit and loss account or other annual accounts to every person from whom the non-banking institution holds, as on the last day of the year to which the accounts relate, deposits higher than such sum as may be specified by the RBI.
g) Power of RBI to call for information from financial institutions and give directions - S. 45-L
The RBI may for the purpose of enabling it to regulate the credit system of the country to its advantage ask NBFCs to periodically submit such information as it requires and give directions generally or particularly relating to its conduct of business. The information requested may concern the paid-up capital, reserves or other liabilities, the investments whether in Government securities or otherwise, the persons to whom, and the purposes and periods for which, finance is provided and the terms and conditions, including the rates of interest, on which it is provided. While issuing such directions, the RBI shall give due regard to the conditions in which and objects for which the NBFC is established, its statutory responsibilities as well as the effect of such directions on trends in the money and capital markets.
h) Powers if Inspection - S. 45-N
The RBI may at any time cause an inspection to be made by one or more of its officers or employees or other persons -
i) of any non-banking institution, including a financial institution, for the purpose of verifying the correctness or completeness of any statement, information or particulars furnished to the RBI
ii) of any non-banking institution being a financial institution, if the Bank considers it necessary or expedient to inspect that institution. It is statutorily required that the management of the NBFC co-operate and produce such documents as may be required before the inspecting authority. The inspecting authority may also examine on oath any director or member of the management or employee of the company.